Cal-Maine Meals: Chicken Flu, Pre Easter Seasonality And Upcoming Earnings Report (CALM)

The shell egg world is a fragile juggle between provide and demand dynamics. Simply after Easter, USA’s largest shell egg producer and distributor, Cal-Maine Meals, Inc. (NASDAQ:CALM), will launch its Q3 2024 Earnings outcomes. Outcomes can be positively influenced by the typical egg value, which has proven an upward development in 2024 because the winter season elevated bird flu cases, decreasing the nation’s egg provide. In a single month, the typical value per dozen eggs jumped by $0.48 to $3 in February. Moreover, pre-Easter occurs to be one of many seasons with the highest egg demand for egg producers. On the price aspect, I’d count on to see higher margins as corn and soybean provides improve, pushing down the hen feed costs in 2024. Nevertheless, the inventory is at the moment buying and selling at a premium, growing by 28.43% within the final six months. Final monetary yr, we obtained a style of simply how a lot People are keen to pay for eggs, and the corporate skilled an entire outlier of a yr with record-breaking prime and backside line outcomes, which I imagine additionally nonetheless impacts the inventory value in the present day. Except we see inflation soar and a extreme chook flu outbreak within the subsequent few months, it’s unlikely that Cal-Maine can prime final yr’s efficiency. Subsequently, I don’t suggest shopping for the inventory and preserve a maintain ranking.

Firm updates

Once I first wrote about Cal-Maine Meals, the corporate was on its strategy to delivering its record-breaking FY 2023, influenced by value inflation, under-supply and robust demand, main egg costs to achieve a historic peak common of $4.82. Throughout the shell egg enterprise, it’s important to understand that there are critical limitations concerning what the enterprise can management to find out its efficiency. Whereas chook flu breakouts have been recorded since the late 1800s, the outbreak that began in 2021 has been essentially the most extreme. Whereas chook flu may be deadly to an organization’s manufacturing, conversely, a deficit in provide pushes up the worth, because the demand for eggs stays comparatively constant. Earlier than 2022, it was uncommon for the worth of a dozen eggs to surpass $2. Subsequently, the rewards may be beneficiant in case your chickens are comparatively unscathed.

The end result, as proven within the graphs under, is a serious efficiency outlier. It is because of a novel mixture of provide and demand dynamics slightly than the corporate enhancing its operational capabilities. Cal-Maine almost doubled its top-line income to $3.15 billion and grew its EPS by a a number of of 5.7 to $15.52.

Because the peak common egg value in January, costs continued to drop for the rest of 2023, again to $2.04 in August 2023, alongside a decline in chook flu circumstances and a discount in inflation. We will see this influence on the FH outcomes of fiscal 2024. The corporate has missed EPS and income expectations for Q1 2024 and Q2 2024, though outcomes are considerably greater than in FY2022. Nevertheless, as egg costs have elevated during the last three months, alongside enhancing hen feed costs, we should always count on extra substantial leads to Q3 2024.

So, we will take a look at Cal-Maine’s actions, reminiscent of a completed acquisition of some shell egg manufacturing belongings beforehand owned by Tyson Meals, Inc. (TSN), which may gain advantage operations sooner or later. Nevertheless, whether or not Cal-Maine will ship stellar outcomes will rely extra on the continued decreasing of corn and soybean costs, potential inflation and a spring season chook flu outbreak, ideally not severely impacting its personal manufacturing. Chicken flu outbreaks are extra typical in winter, however migration makes spring outbreaks potential. Contemplating all of this, the corporate is unlikely to surpass FY2023 monetary outcomes.

Monetary highlights

Financials are undoubtedly going to look disappointing relative to the prior yr. The FH of FY2024 has not met analyst expectations and was impacted by a decline in common egg value, though demand was extra important than the yr prior. The upcoming Q3 2024 will probably profit from value hikes over the previous couple of months because of the rise in chook flu circumstances over the winter months. Moreover, prices needs to be much less as hen feed is predicted to be cheaper. Nevertheless, submit Easter, the worth of eggs sometimes decreases, indicating that there’s little or no probability that the corporate can ship enhancing its outcomes.

If we take a look at the corporate’s historic efficiency, quarterly money from operations is upward trending if we ignore FY2023 and take into account it an outlier.

The corporate has a wholesome stability sheet with zero debt and surplus money, totaling $567.83 million, which permits it to maintain the enterprise operating and put money into progress with out taking out critical money owed. It’s extremely liquid and might cowl its short-term liabilities if we take a look at its present ratio of 6.92 and its fast ratio of 4.99.

Valuation

Wall Street analysts price Cal-Maine a 3.33 maintain, and the inventory is buying and selling properly above its common value goal of $54. These will not be notably engaging metrics. We will see that the inventory is very rated throughout Searching for Alpha’s Quant valuation metrics. Nevertheless, that is primarily attributable to TTM outcomes being closely influenced by the outlier efficiency in 2023. Its FWD price-to-earnings GAAP ratio of 15.58 falls below the buyer staple phase median of 18.26. Nevertheless, its ahead price-to-sales ratio of 1.37 is above its five-year common of 1.29, indicating that it could be overvalued on the present value.

We will examine Cal-Maine to Important Farms, Inc. (VITL), the one different egg firm on the inventory market. Nevertheless, it’s centered on higher-margined pasture-raised eggs. It’s nonetheless in a progress section and newer to the inventory market. Whereas Important Farms doesn’t supply a dividend program, the inventory has outperformed Cal-Maine during the last yr. It has the next YoY top-line progress price of 30.33% versus 5%. It has a extra beneficiant gross revenue margin of 34.40% versus 29.89% and upward-trending financials in comparison with the downward development Cal-Maine is experiencing. Subsequently, Important could also be a greater various for long-term traders throughout the present market circumstances.

Dangers

Whereas Cal-Maine holds the place of the most important egg producer within the US, one key threat on this enterprise is that no matter your operational success and market share, throughout the shell egg enterprise, there are critical limitations concerning what the corporate can management to find out its total efficiency. The variety of exterior elements that may influence value, prices, and provide make this a dangerous and comparatively risky inventory. Moreover, the corporate can also be coping with some legal proceedings, which may be expensive and drawn out.

Closing ideas

As we get nearer to Q3 2024 earnings, the corporate is more likely to see upward-trending top-line income and higher margins in comparison with the FH of FY2024 attributable to common egg costs growing and meals prices reducing. Nevertheless, eggs stay less expensive than one yr prior, and inflation, though rising once more, seems much less extreme. Moreover, the inventory has elevated by 27% during the last six months, and there appears to be little upside because it trades properly above the typical value goal. Subsequently, I don’t suggest investing within the inventory now and provides it a maintain ranking.