Have you seen the price of eggs lately? A dozen jumbo eggs at our local grocery store are selling for $5.79. I could hardly believe my eyes when I saw that on Saturday.
Egg prices reportedly rose 49% year over year in November, but that's just the tip of the iceberg. In January 2022, a dozen large eggs cost about $1.50. There is better bang for your buck buying in bulk; at Costco (COST) , for instance, you can buy five dozen eggs for about $15.
The root cause of the price increase is not inflation per se, although it is one reason, but rather a supply reduction caused by the bird flu. Feed prices have been on the upswing, too, but that is a minor player in this meteoric rise.
The one pure egg play for stock traders is Cal-Maine Foods (CALM) , which graced one of my Ben Graham "Stocks for the Defensive Investor" screens back in 2016. Indeed, Cal-Maine has been a beneficiary of the run-up in egg prices. Its shares are up 37% over the last 12 months. Revenue jumped 110% year over year in the recently reported second quarter and the company registered a 24.8% net profit margin. For perspective, Cal-Maine's annual net profit margin averaged less than 4% over the past five years.
The windfall has grown Cal-Maine's coffers to $379 million, or nearly $8 in net cash and short-term investments per share. This cash hoard also allowed the company to pay shareholders $1.73 in dividends in 2022. The company does not pay regular quarterly dividends, but rather has a policy of paying out one-third of quarterly income. If the company loses money in a quarter, no dividend is paid.
Consequently, investors should be wary of currently reported fundamental data. For instance, the dividend yield is indicated at a seemingly solid 5.65%. But because that yield is based solely on the most recent dividend of 85.3 cents a share, it needs to be taken with a grain of salt as it is unlikely to remain at that level for long. While CALM earnings are expected to remain elevated for the next two quarters (consensus is for earnings of $4.55 a share in the third quarter and $3.24 a share in the fourth quarter) and the dividend may rise given the payout methodology, the payout will fall if and when earnings normalize.
You also need to be wary of the company's price-to-earnings ratio data. Based on 2023 estimated earnings of $14.42 a share, the forward P/E ratio stands at less than 4. Again, that reflects elevated earnings due to the run-up in egg prices. Consensus earnings estimates for 2024 ($4.77 a share) imply a forward P/E ratio of 11.5, while for 2025, with estimated earnings of $2.33 share, the forward P/E increases to about 24.
The point is to be cautious when considering the fundamental data for CALM. Cal-Maine's recent good fortune appears to be transient, assuming that the supply of birds normalizes. This is clearly a stock for traders and not buy-and-and hold investors.
For those interested in technical analysis, please see Bruce Kamich's late December piece on CALM.
