Is egg producer Cal-Maine Foods (CALM) starting to crack?
About a month ago, we looked at the shares as they traded in the mid-$50 area, in what has been an incredible year for the company. Since then, shares have given back about 9%, including the huge $2.20 dividend that went ex on April 25.
Now the question is whether the stock is spoiling?
With egg prices soaring for much of the past couple of years, not so much due to inflation, but rather a depleted chicken population, the company has already earned $12.69 in the trailing 9 months, and is expected to generate full year 2023 earnings of $16.36. That puts the price earnings ratio under 3. What's wrong with this picture?
Well, with egg prices coming back down to earth, consensus earnings estimates for 2024 ($4.41) and 2025 ($2.93) are also falling, implying forward price earnings ratios of 11 and 16 respectively. The banner earnings of 2023 are all but in the rearview mirror.
This is not to say that there's no holdover benefit to the company, though: CALM grew its cash and short-term investment coffers to $645 million as of the end of the latest quarter, up from $97 million year over year. With no debt, that equates to more than $13 per share in net cash and short-term investments. In addition, with a variable dividend policy that pays out a third of company earnings, shareholders have already received $4.40 in payouts over the past three quarters, and the next payment should be in the $1 range, based on fourth quarter consensus earnings estimates of $3.11.
CALM's move from here may be influenced by one other factor: a current short interest ratio of 16.6%, and the possibility somewhere down the line of some short-covering. That's not a huge amount of short interest, we've certainly seen bigger, but it could be a player.
The company may have a weapon in its arsenal should shares take a tumble. What's that? Share buybacks. It certainly has the resources; over the past several years, CALM has bought back minimal amounts of stock, but if investors end up pushing shares into value territory, $645 million in liquidity could make a significant impact.
It's wait-and-see time with CALM. I don't want to own shares here, but will look for a potential overreaction that could put it into value territory.