Cal-Maine Posts Record Quarter, Remain CALM Income Investors

Key Points

• Cal-Maine posted a record-setting quarter for revenue, margin and earnings. 
• The dividend was increased by 58% sequentially to nearly 8.75% annually. 
• The outlook for 2023 is for similar strength in results and dividends. 

Shares of Cal-Maine NASDAQ: CALM are moving lower in pre-market action, and it might make you think the company had a bad fiscal 2nd quarter. That is not the truth. The truth is that Cal-Maine had a record-setting quarter on many levels and is in a position to do so again and again in calendar 2023. 

The driving factors for the business include efficient operations, strong consumer demand and record-high egg prices that should remain at elevated levels for the foreseeable future. A shortage of egg-laying hens is supporting egg prices due to the ongoing virulent HPAI epidemic in the US flock.

As of the reporting, Cal-Maine has had no positive tests for HPAI at any of its own or subsidiary farms. Assuming the company can manage this crisis as it has been doing, the signs are good, and we’ll record dividends in 2023 as well. 

Cal-Maine Misses Consensus, Shares Fall 

Cal-Maine had a record-setting quarter that is only marred by the fact its results are mixed in relation to the analyst's estimates. The top-line of $801.7 million in revenue beat by a slim 50 basis points while the GAAP EPS of $4.08 missed by about 450. Investors should focus on revenue growing more than 110% YOY and delivering record-setting EPS.

The strength in revenue was driven by the combination of strong demand coupled with rising prices that have conventional egg prices at record levels and more than double the YOY comparison. Specialty eggs, the company’s core growth driver, were also strong, with pricing up 25% and volume up 2.4%. Regarding mix, specialty eggs, a higher-margin product, grew to a record 30% of sales and helped drive margin strength. 

The company reported a gross profit margin of 39.6%, a record but slightly short of expectations. The takeaway is that EPS grew many thousands of percentage points from $0.02 last year to $4.08 this year and has also led to record dividend distributions.

The company’s dividend distribution plan requires it to suspend dividends when it posts a loss, and it has not been losing money for several quarters. The dividend has been paid for four consecutive quarters, with growth in every quarter. The FQ2 distribution was increased by 58% on a sequential basis due to the earnings strength, and this level of payment can be expected for the foreseeable future. And the yield? It’s running near 8.7%. 

The company did not give guidance but did issue a favorable outlook for the table egg market. The HPAI outbreak is expected to continue putting downward pressure on the flock size, which is already well below the 5-year average. The current outlook suggests the flock size will not regain the 5-year average level until late 2023, which may be an aggressive estimate.

HPAI is circulating in the wild bird population and will likely continue to cause problems for the egg market well into 2023. In this light, Cal-Maine should be able to produce comparable results even if its flocks are affected by the outbreak. 

The Sell-Side Is Buying Cal-Maine

Analysts and institutional activity in Cal-Maine were mixed, but investors should be aware of a notable shift in the action. The institutional activity was net-bearish in the year's first half but turned bullish in the back half. As of the FQ2 report, bullish activity is rising, and total ownership is up to 89%. Major holders and recent buyers include BNY Melon, BNP Paribas, AllianceBernstein, Vanguard and BlackRock, which own more than 23% of the company. The analysts are less robust in their coverage but have the stock pegged at a solid Buy and view it as fairly valued near current price levels. 

The price action in CALM shares hit a peak just days before the report was released, and it is now down roughly 10% from that peak. At this level, the market is trading near the 30-day EMA and above the 150-day EMA, where it may find support. Assuming the market buys on the dip, investors might expect to see shares of this stock consolidate at or near current levels before moving higher sometime in 2023. If not, this stock could correct another 10% before it hits bottom.