- This stock remains an incredible stock to trade, and we like entering for swings.
- Short interest has risen.
- Inflation is weighing on earnings power.
- Dividend won't return until there is $21 million recovered in earnings.
- We think pricing this year improves, but watch the hatch rate and the hen supply.
- Looking for more investing ideas like this one? Get them exclusively at BAD BEAT Investing. Learn More »
Cal-Maine Foods (NASDAQ:CALM) is still a stock that we frequently trade, and is often asked about in our trading service. Here is the deal. Trading this stock is pretty much like trading an energy stock. Why? Energy stocks move with oil and gas largely, while Cal-Maine stock moves with egg pricing and feed costs. Volumes of course matter for revenue, and there need to be customers, but it really is all about egg-pricing. Generally, the stock gets to these levels when egg pricing falls. Inflation has crept up, and it has weighed on food costs, while the costs of eggs have not outpaced these increases.
Cal-Maine stock has been a very reliable and predictable trade in relation to these key metrics. In short, you can with relative ease, planning, and patience, make a ton of money here over and over again. Again, the critical metrics to watch with this company are egg pricing, feed costs, and of course volumes of eggs sold.
Short interest in the stock is above 10% of the float, and has held steady around 4.7 to 4.9 million for a few weeks, suggesting bears feel confident that shares will decline. We tend to agree in the high $30s, but believe shares will be a buy sub $35. The stock has traded in a reliable range. Egg prices fluctuate, while feed costs are a key expense. Demand has remained high and commercial demand has improved. This is how we would play this one:
Source: BAD BEAT Investing
This is a 5-year chart, and it's pretty clear anyone who invested over this time frame has gotten killed, even with an occasional dividend. However, it has been an excellent trade long and short over the years. Right now, it looked like after earnings we may be heading to the sub $35 level which we consider a great buy. There is a lot going on in the world which impacts how much money Cal-Maine can make, but that seems to change every six months. Keep that in mind. We have a long bias from $36 and below but really love a position under $35 if it gets there. Upside is limited, but reliable 7-10% swings can be had.
Entry 1: $35.90-$36.20 (20% of position)
Entry 2: $34.50-$34.70 (30% of position)
Entry 3: $34 (50% of position)
Exit 1: $37.50 (50% of position)
Exit 2: $38.25 (30% of position)
Exit 3: $39.75 (20% of position)
At this time, no stop loss is recommended given the trading history and the basic long-term fundamentals.
Egg volumes are important, but pricing is the main driver
The company just reported earnings ahead of the New Year. The critical metrics that were aforementioned? Well, they led to a top line beat against consensus estimates, though earnings missed horribly. This was very bearish and driven by costs. However, it seems to start the New Year that egg pricing is being watched. If prices shoot higher this year, the stock will follow, but if they do not move much, the stock will suffer if costs keep rising. The stock has begun rising in anticipation of this but we think you get better pricing, per our trade idea.
Let us be clear, the revenue figures for Cal-Maine are correlated with the price of eggs, but volume is a key driver as well. Keep watching egg pricing and economic reports which can greatly change egg pricing, like if there is avian flu for example, or if there is something in the chick hatch rates that are published regularly.
We contend that demand from consumers and businesses has remained stable over the years outside of the height of COVID-19 in March/April 2020, and is strong, and is on pace with getting back to pre-pandemic levels in food service. We suspect greater demand in dining in 2022, which is a medium-term positive catalyst for Cal-Maine. At home, egg demand has held up.
Net sales in the just reported fiscal Q2 were $390.9 million, which were up 12.5% from last year. The increase in sales was a result of better pricing, but there was actually a nice increase in conventional and specialty egg volumes. The company sold 276.1 million dozen eggs this quarter, compared to 273.7 million dozen last year. CEO Dolph Baker gave an update on hatch rates and hen inventory:
The table egg layer hen inventory reported by the USDA as of December 1, 2021, was 327.8 million, an increase versus the prior year and trending below the five-year-average. The USDA also reported that the egg-type chick hatch from July 2021 through November 2021 decreased 2.0 percent compared to the prior-year period. As of December 1, 2021, eggs in incubators totaled 48.4 million, down 9.1 percent year over year..... Our sales volumes also improved compared to the previous record sales volumes in the second quarter of fiscal 2021. We are pleased that our operating results helped drive a return to modest profitability in the second quarter despite the impacts of higher costs for feed ingredients, processing, packaging, transportation and labor.
The higher sales volumes were a big positive and built on strong trends from earlier this calendar year. Remember that specialty eggs are a critical driver of the company's growth. Specialty egg dozens sold were 30.3% of all sales this quarter vs. 26.4% last year. Higher specialty egg revenue was a result of 15.7% increase in specialty eggs overall but the pricing was up just 0.4%. Pricing was once again more favorable this quarter compared to a year ago, though minimally so. Any real bump up in pricing will help tremendously with margins and the stock. The key part of the equation to watch is feed costs and we have been sounding the alarm for a few quarters on this front.
Feed costs rising with inflation
Feed costs have remained pretty low versus where they were a few years ago, up until this year, rising much like the cost of everything lately. Inflation is pretty nasty right now and margins of many commodity companies should be watched. When feed costs rise, it is a concern, and they are rocketing higher. One concern with specialty eggs making up more sales is that the feed costs here are generally higher than traditional eggs. Inflation costs are starting to be reflected here. Feed costs have risen all year, weighing on margins. Inflationary environment has led to higher costs for feed, labor, packaging and delivery. Farm production costs were up 21.6% vs last year. They rose mainly due to the 29% percent rise in feed costs vs. last year, hitting $0.529 per dozen. That hurts margins, but we will say costs were down 2 cents from last quarter, so that's good. Dolph Baker added:
Corn and soybean supplies remained tight relative to demand, primarily related to higher export demand, as well as weather-related shortfalls in production and yields. We expect market prices for our primary feed ingredients to remain volatile this fiscal year, given the ongoing disruptions related to the COVID-19 global pandemic, weather fluctuations, geopolitical issues and overall reduced carryout levels for primary feed ingredients....In spite of current and expected inflationary headwinds, we remain focused on what we can control by managing our costs and running efficient operations.
In our opinion, we expect to see continued input costs volatility for the bulk of this year. The rising costs hit those margins, so it can be offset if egg prices rise too, and if the company can control other sources of expenses. The company saw an overall net income of $1.2 million, or $0.02 per share. While it was a nice tiny profit, it missed estimates by $0.2, but no dividend will be paid.
Reminder on the variable dividend policy
So investors have been killed in this one over the last five years, but there has been the occasional dividend to soften the blow. It has been a dividend that comes and goes. Cal-Maine pays this so-called variable dividend where shareholders get paid when the company is net profitable on a cumulative basis.
At Cal-Maine, the policy has long been that the dividend paid to shareholders is equal to one-third of quarterly income. The thing is that the company looks at income on a cumulative basis over the course of operations. So to end Q2, the total cumulative loss to be recovered before payment of a dividend was $21.2 million.
We like a position in the mid- to low-$30s. Operations are still pressured by rising costs. Egg pricing has gotten better from the lows but could use more to get the stock going. We think pricing this year improves, but watch the hatch rate and the hen supply. Commercial demand is picking up. Once again, this is a very tradeable stock.
Be a Winner and Make Moves with our team
Stop wasting time and join the community of 100's of traders at BAD BEAT Investing.
- Access an expert team of 4 analysts, available all day during market hours.
- 6 different chat rooms
- Rapid-return trade ideas each week with crystal clear target entries, profit levels, and stops
- Stocks, options, trades, dividends, and one-on-one portfolio reviews
- Money-back guarantee
- Education, tools, and conversation
This article was written by
We are VERY proud to have created thousands of WINNERS, helping them learn the markets and grow their money. We are the team behind the top performing investing group BAD BEAT Investing. Quad 7 Capital was founded in 2017 by a team that consists of a long time investor, health researcher, financial author, professor, professional cardplayer, and hedge fund analysts.
The BAD BEAT Investing service is a specialized carve out of Quad 7 Capital and launched in 2018. The service is run by a team of hedge fund analysts. This a top performing investing group service relative to market returns. It is focused on trading opportunistic inflections, and leveraging mispriced stocks and momentum driven events for rapid-return swing trades, options education, and long-term investments. We also teach investors how to hedge their portfolios. Further, it offers a direct access line to our traders all day during market hours and provides daily market commentary.
Quad 7 Capital as a whole has expertise in business, policy, economics, mathematics, game theory and the sciences. The company has experience with government, academia, and private industry, including investment banking, boutique trading firms, and hedge funds. We offer market opinion and analysis, and we cover a wide range of sectors and companies, with particular emphasis on news related items and analyses on growth companies, dividend stocks, banks/financials, industrials, mREITS, biotechnology/ pharmaceuticals, precious metals, and small-cap companies.
If you want to win, follow us, and if you want to make real money, sign up to BAD BEAT Investing today.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of CALM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.