Cal-Maine Foods Stock Forecast: Harsh economic conditions can often bring about the best that a business has to offer. For egg producer Cal-Maine Foods (CALM), that’s most certainly the case.
The company is the largest supplier of fresh eggs in the United States, and its stock has been on an excellent recent run. Shares are up over 46% in the last twelve months, and the firm has just released one of its best-ever earnings reports.
But what’s behind Cal-Maine’s superior performance of late? And is it still a worthwhile investment today?
Record Fourth Quarter Revenue
Egg prices absolutely skyrocketed in 2022. The cost of a 12-pack carton rose 129% year-on-year, and, despite this hefty mark-up, consumers didn’t seem to mind paying the difference one bit.
Indeed, with inflation seemingly out of control right now, eggs are a reasonably cheap source of protein – especially when you compare them to the cost of more expensive meat and fish alternatives.
Considering the demand for its products is so strong at the moment, it’s no surprise that Cal-Maine closed off the year with a record fourth quarter in 2022. The company posted its highest revenue for the period at $593.0 million, up 69.5% from the $349.8 million it made in 2021.
Moreover, the business also turned a profit this quarter, bringing in another record for the firm with a net income of $110.0 million.
In addition to robust demand, there are also several other reasons why CALM has done so well recently.
To begin with, the United States is experiencing one of the worst outbreaks of highly pathogenic avian bird flu, resulting in devastating losses to commercial and backyard flocks. Given that 40.2 million individual birds have been affected as of August 2022, it’s natural that Cal-Maine’s own 42 million hens will have suffered to some extent too. This has constrained egg supplies nationwide and driven up retail prices across the board.
Furthermore, the cost associated with raising chickens has also risen this year. The export market in grain has been impacted by the Russia-Ukraine war, with feedstock increasing 28% over the past twelve months.
On top of that, Cal-Maine also had to contend with increasing delivery costs due to escalating fuel prices, as well as higher employment expenses arising from a tightening labor market.
Fortunately, the firm was able to pass on these increases to customers, improving its sales and bottom line to a substantial degree.
Bir Flu and Macro Risks Pose Headwinds
While the bird flu pandemic has definitely contributed to price rises throughout 2022, it appears that the disease has already passed its peak. The outbreak affected a total of 106 flocks during April this year, but has fallen dramatically to just one flock today.
Indeed, if this declining trend continues, it’s likely that egg prices will return to their baseline level once again. And even if prices don’t fully normalize, any drop in cost will necessarily be detrimental to the company.
Another potential headwind could come from a worsening macroeconomic outlook. For instance, if inflationary pressures continue to become more onerous, there’d be no guarantee that CALM could pass on its own cost increases to shoppers. At some point, demand would eventually recede, taking the company’s profits and potential sales with it.
Price and Valuation
It wasn’t just a bumper fourth quarter for CALM in 2022 – it was also a great year for the company as well. Net sales of $1,777.2 million compared favorably with the $1,349.0 million it generated in fiscal 2021, while Cal-Maine’s gross margin of 19% was a significant improvement on the 11.9% it recorded a year before.
However, the business truly surpassed itself when it came to profitability. The company grew its earnings a massive 6700% to $2.72 per share – a magnitude so large it’s almost unheard of in the relatively stable and predictable Consumer Staples sector.
Furthermore, the company’s solid cash position also enabled it to increase its dividend by a staggering 499%. In fact, Cal-Maine has a policy of returning one-third of its profits every time it reports a net positive quarter, ensuring the added benefit of always keeping its payout ratio at a modest 33%.
Its forward yield is on the low side at 1.58%, although that’s mainly a consequence of its relatively high stock price of $52.
Things are looking good from a valuation perspective too. CALM’s enterprise value-to-EBIT multiple is excellent for the industry at 7.86x, while its GAAP price-to-earnings ratio of x10.5 is also equally pleasing.
Is Cal-Maine Foods A Buy?
Cal-Maine Foods is one of the top performing stocks of 2022. The company has seen strong growth in both earnings and sales, and its share price has delivered for investors when many other businesses are feeling the pinch.
The company’s specialty eggs are also growing as a fraction of its overall sales. This should turn out to be another tailwind for Cal-Maine, as these products can generate more profit than its conventional offerings do.
Admittedly, egg prices appear sensitive to certain cost inputs, exposing them to higher levels of volatility. As it stands, the balance of these inputs is in CALM’s favor – although this might not last forever.
However, despite some prevailing pandemic headwinds, Cal-Maine has been able to adapt and grow. The brand is finalizing plans to approve a $55.3 million capital project to expand the firm’s cage-free production capabilities, demonstrating a reassuringly bullish approach to its future.
This should be a signal to investors that the business has high hopes going forward, and you can expect its current run of excellent form to continue unabated.
Cal-Maine Foods Stock Forecast: Wrap-up
When we ran the numbers on Cal-Maine Foods, a discounted cash flow forecast analysis reveals upside of 12.4% to $59.34 per share.
If you were to categorize the stock across key dimensions, it has excellent growth, top notch cash flow and profit health and so-so reward to risk ratio.
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