Cal-Maine Foods' Future Is Uncertain Amid An Inflationary Egg Environment

Jun. 26, 2022 9:47 AM ETCal-Maine Foods, Inc. (CALM)7 Comments2 Likes

Summary

  • Cal-Maine Foods is caught in a tight spot between rising labor costs and soaring egg producer prices.
  • CALM's valuation is near fair value while its dividend policy suggests profitability is difficult right now.
  • The technical chart is trendless over the long term, but there's a near-term bullish swing opportunity for tactical traders.
Midsection of man stroking hen at poultry farm

SimonSkafar/E+ via Getty Images

Inflation continues to run amuck. One company at the heart of the sharp rise in both producer and consumer prices is Cal-Maine Foods (NASDAQ:CALM). Cal-Maine engages in the production, grading, packing, marketing, and distribution of fresh shell eggs. The firm operates farms, processing plants, hatcheries, feed mills, warehouses, offices, and other properties, according to The Wall Street Journal.

CALM is the largest producer and distributor of shell eggs in the United States (19% market share). Popular brands include Egg-lands Best, Land O' Lakes, and Farmhouse Eggs, according to Bank of America Global Research.

It’s always tricky to interpret what a higher input price on a key commodity, like eggs for CALM, means for profitability. With a large Southeast footprint where egg prices might remain stable, according to BofA, higher feed prices and labor costs could pressure margins. Another curveball right now is what’s happening with the Avian Flu which has impacted 28.8 million egg-laying hens (9% of the flock) as of February 2022, per a recent company Investor Day.

Egg Producer Prices Up Huge YoY, Highest since 1992

Egg Producer PRices Up Huge YoY, Highest since 1992

BofA Global Research

The $2.4 billion market cap Consumer Staples stock grapples with soaring labor and input costs, but can pass along a chunk of those higher COGS to consumers. CALM features a small dividend yield of just 1.0%. Its shares short represent 14.7% of float, according to the WSJ. That means quick short-covering rallies can be a friend to the bulls. The Mississippi-based company has missed on earnings in its two most recent quarters while its variable dividend policy proves that times are a bit challenging for CALM right now.

On the fundamentals, BofA sees EPS improvements in the coming years. As earnings rise, its P/E multiple should come down to normal levels. Moreover, better profitability will likely result in bigger dividends based on its variable payout policy. While free cash flow was negative in 2020 and 2021, that key metric should turn positive in 2023 and 2024, according to BofA analysts.

CALM Earnings Estimates, Valuation, Dividend Forecast

CALM Earnings Estimates, Valuation, Dividend Forecast

BofA Global Research

CALM’s price-to-book ratio remains below its long-term average, which suggests shares are near or slightly below fair value. BofA believes 2.0x is a proper P/B given current challenges.

CALM Historical Price-to-Book Multiple: Slightly Inexpensive vs LTA

CALM Historical Price-to-Book Multiple: Slightly Inexpensive vs LTA

Koyfin Charts

The corporate event calendar is light after a few key conferences in the last two months. Wall Street Horizon reports that CALM has an unconfirmed earnings date of Monday, July 18, AMC.

Corporate Event Calendar: Earnings In Three Weeks

Corporate Event Calendar: Earnings In Three Weeks

Wall Street Horizon

The Technical Take

Turning to the charts, CALM is simply rangebound in the last eight years. The low $30s to low $60s, without much yield along the way, has been frustrating for long-term holders. This trendless long-term action (relative weakness vs the U.S. stock market) on CALM is not exciting in the eyes of a technician. But let's home in on the near-term chart for more clues.

CALM Long-Term Chart: Rangebound

CALM Long-Term Chart: Rangebound

Tradingview.com

I see support on the one-year daily chart. CALM shares generally held $43, which was also the 61.8% retracement of the late 2021 to April 2022 rally. A small false breakdown below the May low just recently, which had bullish RSI divergence, made a nice catalyst for a more than 10% rally to the close last Friday. $43 is support and there could be resistance near $53 as well as at the $60 YTD high.

CALM: Bullish Divergence, Holds Key Fibonacci Retracement Support, Resistance Near $53

CALM: Bullish Divergence, Holds Key Fibonacci Retracement Support, Resistance Near $53

Stockcharts.com

The Bottom Line

CALM is at the center of the inflationary storm right now. Shares rallied big this year through early April, and the recent pullback presents a tactical trading opportunity from the long side with a stop under $43, but long-term, profitability trends need to improve while technicians would like to see definitive signs of an uptrend. I’m a hold on this Staples stock overall.

This article was written by

CFA & CMT Charterholder | Freelance Financial Writer at SoFi & Ally | Investments | Markets | Personal Finance | RetirementI create written content used in various formats including blogs, emails, white papers, and social media for financial advisors and investment firms in a cost-efficient way. My passion is putting a narrative to financial data. Working with teams that include senior editors, investment strategists, marketing managers, data analysts, and executives, I contribute ideas to help make content relevant, accessible, and measurable. Having expertise in thematic investing, market events, client education, and compelling investment outlooks, I relate to everyday investors in a pithy way. I enjoy analyzing stock market sectors, ETFs, economic data, and broad market conditions, then producing snackable content for various audiences. Macro drivers of asset classes such as stocks, bonds, commodities, currencies, and crypto excite me. I truly enjoy communicating finance with an educational and creative style. I also believe in producing evidence-based narratives using empirical data to drive home points. Charts are one of the many tools I leverage to tell a story in a simple but engaging way. I focus on SEO and specific style guides when appropriate. My CFA and CMT backgrounds demonstrate prowess in investment management and my professional experience includes extensive public speaking and communication. Moreover, my extensive university teaching and professional trading experience provide useful skills. Past roles also include heavy use of Excel modeling and chart creation as well as PowerPoint.I am a contributor to The Dividend Freedom Tribe. I am a contributor to Topdown Charts.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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