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Bear of the Day: Cal-Maine Foods (CALM)

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Investing in poultry carries certain risks like, fluctuating volumes, and changing consumer tastes.  The combination of these risks have negatively impacted our Bear of the Day, Cal-Maine Foods (CALM - Free Report) .  The company saw lower institutional demand for egg products which caused inventories to increase, and subsequently put pressure on the overall selling price.  To make matters worse, a USDA report showed that there has been an increase in chicks hatched, increasing the total supply which is resulting in more pressure on selling prices.  

This Zacks Rank #5 (Strong Sell) company is engaged in the production, cleaning, grading, and packaging of fresh shell eggs for sale to shell egg retailers. The company is the one of the largest producers and distributors of fresh shell eggs in the United States. The company markets its eggs primarily in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States.

Earnings Release

Cal-Maine Foods reported Q1 17 results on 9-26 where they posted year over year losses in multiple categories; Net sales are down -60.7%, amount of Dozen eggs sold fell by -6.4%, amount of Dozen eggs produced declined by -1.9%, Specialty egg pricing dropped by -20%, Specialty egg volume fell by -4.5%, selling prices fell by -58%, and net income plummeted to $0.64 per diluted share from $2.95 per diluted share in Q1 2016.  

Management’s Take

According to Dolph Baker, Chairman and CEO, “Our results for the first quarter of fiscal 2017 reflect a disappointing shell egg market with more challenging market conditions and significantly lower market prices than the first quarter of fiscal 2016. Average customer selling prices dropped 58 percent from the record high levels we experienced a year ago. As the supply of shell eggs moved higher after the disruptions created by the Avian Influenza outbreak in the spring of 2015, market prices declined. Retail demand remained favorable; however, lower institutional demand for egg products and reduced egg exports pushed inventory levels higher and created additional pricing pressures. As cited in recent USDA Chickens and Eggs Reports, the increase in chicks hatched indicates the national laying flock will continue to expand. Based on this report, we expect the shell egg supply will continue to grow through calendar 2016, and then we may begin to see a correction early next year.”

Price and Consensus Earnings Estimates Graph

As you can see in the graph below, the stock price has been declining in 2016, and future earnings expectations are below the current stock price.

CAL-MAINE FOODS Price and Consensus

CAL-MAINE FOODS Price and Consensus | CAL-MAINE FOODS Quote

Declining Estimates

Due to their recent earnings report and previous hurdles facing the company, earnings estimates for Q2 17, Q3 17, FY 17 and FY 18 have all seen declines; Q2 17 dropped from $0.55 to $0.22, Q3 17 fell from $0.83 to $0.75, FY 17 dropped from $1.97 to $1.15, and FY 18 was moved down from $2.75 to $2.45.

Bottom Line

The USDA Chickens and Eggs Report showed that the national “laying flock will continue to expand” which means that Cal-Maine Foods will continue to see pressures on selling prices, volumes, and inventory through the remainder of the 2016 calendar year.

If you are inclined to invest in the Miscellaneous Food/Diversified sector you would be best served by looking into US Food Holdings (USFD - Free Report) , and or Tate & Lyle ADR (TATYY - Free Report) both of which currently carry a Zacks Rank #1 (Strong Buy).

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