Cal-Maine (NASDAQ: CALM) Foods A Fundamental Good Buy About To Break Out

A Hard Stock To Own

Cal-Maine (NASDAQ: CALM) is not such an easy stock to own, over the long-term, for two primary reasons. The first is that, as the nation’s largest consolidated egg-producer, it’s business is heavily dependent on demand, egg prices, production volumes, and seasonality. The second is that it pays a dividend based on a very strict managed-distribution-plan. What this means for investors is that, despite being a fabulous growth stock, capital gains and dividends can be erratic.

Over the past two years, Cal-Maine has been struggling with a demon that was at least partly of its own making. A strong rebound in flock sizes post-bird-flu (2016-2017 time frame) led to overproduction and low, low realized prices for eggs. What’s happened over the past quarter or two is this: the egg market bottomed due to fundamental factors impacting egg prices and the forecast is positive for higher prices yet to come.

Cal-Maine Gives Mixed Results, But Only If You Care About Consensus

Consensus figures are important but only to a point. At some point, the company’s actual results take over and in this case, it is the fundamental drivers of results that matter more than whether consensus targets were beaten. The headline figures are this: Cal-Maine’s 4th quarter revenue of $453.33 million missed consensus by $4.89 million or about 1.0%. What the headline doesn’t tell you is that revenue grew more than 60% on a YOY basis and drove a very profitable quarter.

At the bottom line, Cal-Maine’s Q4 GAAP EPS of $1.24 beat by $0.10 and reverses three consecutive quarters of net losses. The results were driven by a variety of factors that begin with flock size and end with COVID-19 stay-at-home trends. The bottom line? A combination of higher prices and higher demand drove revenue and profit gains and those factors are expected to remain in play through the end of fiscal 2021.

“After three fiscal quarters characterized by an oversupply of eggs and depressed market prices, demand for eggs increased and market prices rose 62.4 percent during our fourth fiscal quarter over the average price for the first three quarters, as consumers purchased more eggs for preparing meals at home in response to the COVID-19 pandemic. This demand trend also coincided with higher seasonal demand during the peak Easter season. As a result, our sales volumes were up 10.9 percent compared with the fourth quarter of fiscal 2019”

Cal-Maine Growth Strategy Backed By Legislation

A pillar of Cal-Maine’s growth strategy is specialty eggs. Specialty eggs include anything with a label other than farm freshers eggs (cage-free, hormone-free, etc) and command a premium price. Over the past two years, sales of specialty eggs have grown to 30%-40% of net revenue depending on demand. The sales mix fell to the low end of the range in the latest quarter but there are some mitigating factors. On a segment basis, sales of specialty eggs grew 10% on increased demand and higher prices despite the negative change in sales-mix.

Looking forward, there is a wave of legislation sweeping the nation to drive growth in this segment in the coming years. At last count, there was pending legislation in 9 states mandating “specialty” egg status for their consumers.

“California, Colorado, Washington, Oregon, Massachusetts, Rhode Island and Michigan have all passed minimum space and/or cage-free requirements, mandating sale of only cage-free eggs with the implementation of these laws ranging from January 2022 to January 2026. These states represent approximately 22.9 percent of the U.S. total population according to the U.S. Census Bureau.”

Cal-Maine Dividend, It’s Coming Back

The company pays a dividend based on a restrictive managed distribution plan that means no dividend will be paid this quarter. This makes the fourth quarter of no dividend but the stage is set for it to be reinstated by the 2nd fiscal quarter of 2021 or two reporting seasons from now. According to the plan, Cal-Maine will pay 33% of profits for any profitable quarter. When the company has an unprofitable quarter it will take at least two consecutive quarters of profits before the payment will be reinstated.

The 4th quarter report is the 1st quarter of profits in three. This means that, technically, Cal-Maine could resume the distribution next quarter. The only color they’ve offered is that a $1.4 million dollar loss-balance remains before the company can/will begin paying a dividend once-again. Based on this quarter’s results and the outlook for 2021 that $1.4 million will be recouped in the 1st quarter. If they begin paying the dividend again or give color to that effect it will be one strong catalyst for share prices.

Cal-Maine Technical Outlook: A Major Break Out Is At Hand

Oddly, shares of Cal-Maine are not popping in the pre-market session but that just means share prices are still trading at a reasonable 23X times earnings. Looking at the weekly charts, I expect to see this stock to begin breaking out over the next quarter. The chart shows a clear bottom confirmed by the COVID-Correction and an upward bias in the time since. The indicators show resistance at the $46 region that may keep price action in check but I would expect at least a retest of that level in the near-term.

Price action since the COVID-bottom smacks of a bullish flag/consolidation. If the price action is able to break to a new high it will confirm the flag and a long-term reversal. In that scenario, shares could add $6 to $12 or 13% to 26% by the end of the year.