The CALM Before The Storm For Cal-Maine (NASDAQ:CALM)

Cal-Maine Is A Speculative Buy Before Earnings

Cal-Maine (NASDAQ:CALM) investors haven’t had an easy time of it over the past quarter. The stock was set up to advance on an expectation of dividend reinstatement but events out of anyone’s control had the oppositive effect. An unexpected share offering took the market by surprise and shaved 16% of the stock’s value. What investors need to remember is that 1) the fundamental story driving the stock is unchanged and 2) there is a mitigating factor to the sale.

The sale, worth 6.9 million shares, is by the wife of the company’s founder. The founder, Fred R. Adams, passed away not too long ago leaving behind his wife and four daughters. The shares were held in trust for the ladies and sold to raise capital for estate taxes. The company in no way benefited from the sale, all proceeds went to the survivors. In terms of the float, the total number of shares available remains unchanged by a sizeable amount that has been released from the institutional column. Regardless, the company still boasts a high 65% insider/institutional ownership.

Cal-Maine Is A Fundamentally Good Buy

The fundamental story is this: way back in 2016 there was this thing called the bird flu. It wiped out a lot of chicken and egg production in the U.S. and led to a boom in the post-recovery period. Going into 2019 large flock-sizes, overproduction of eggs and tepid demand sent Cal-Maine into a period of loss. During 2019 that situation began to bottom and then improve in 2020. The first two calendar quarters of 2020, the 3rd and 4th fiscal quarters, saw the company return to profit and guide the outlook in a positive manner.

From the Q4 report ...

“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”

Over the past quarter, trends moderated from the previous but remain favorable to profitability and that is important. Total demand fell from a peak in April to a low in June that is below last year’s level but pricing remains strong. Pricing held steady or slightly above last year’s level throughout the period which will offset some but not all of the demand difference. We’re not looking for results to match the prior quarter though, just produce enough revenue to offset costs and leave a profit.

Cal-Maine Could Bring The Dividend Back

Cal-Maine pays a dividend according to a strict MDP or managed distribution plan. According to the plan, the company can’t pay dividends after an unprofitable quarter until there have been two consecutive quarters of profitability. The last reported quarter is the second of two profitably quarters but the board decided not to bring it back just yet. The company revealed there was still $1.4 million in net capital losses to recover, worth about $0.033 per share, and they preferred to wait. This may not seem like a lot but Cal-Maine has one of the most rock-solid fortress balance sheets on the stock market today and they like to keep it that way.

So, the consensus for the calendar 3rd quarter/fiscal 1st is a loss of -$0.55 per share on revenue of $282 million but I think that is too low. I do not expect to see the company come close to the prior quarter’s results but I do think profitability is more than possible. The consensus $282 million in revenue is on par with prior profitably quarters and should deliver at least enough to ensure a dividend next quarter if not this one. As for next quarter, the USDA says pricing for eggs is still firm and demand is rising above YOY levels so it should be a good one.

Cal-Maine Is Forming A Bottom

There is risk in this outlook, Cal-Maine could easily miss my target and deliver another unprofitable quarter. Until then, the chart looks good for reversal and is setting up for at least a retest of resistance if not more. Price action is sitting above a key level of support and forming a possible double-bottom. I say possible because the stock has not confirmed the pattern and is technically still in a downtrend.

However, the indicators are consistent with support at the current levels and a move higher, the question is how high will it go? The first best target for resistance is the moving average near $40, if that is broken then a bigger move is possible. The company reports earnings on Monday, so we won’t have too long to wait to find out. If the company does report well and brings back or positively guides for the dividend this stock is going to hit $44 and $46 really fast. If not we’ll probably get a retest of the $37 level with a chance of even lower prices.