The sharp rise in egg prices in 2023 has been one of the most interesting business stories of the year. The average cost of a dozen eggs has fluctuated between $1 and $2 for most of the last decade before skyrocketing to over $5.00 per dozen in January and February. This provided a short-term profit boost to many nation-wide egg producers. The largest benefactor of this boost in egg prices was Cal-Maine Foods Inc (CALM, Financial).
About Cal-Maine Foods Inc
The company is the largest producer and distributor of shell eggs in the U.S. with a 19% market share. Its operations are completely vertically integrated, including hatching chicks, developing hens and producing, processing, packaging and distributing shell eggs. Cal-Maine Foods Inc (CALM, Financial) provides two types of shell eggs, conventional and specialty eggs. Major brands include Egglands Best, Land O' Lakes and Farmhouse Eggs.
The company sells most of its eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the U.S. Founded in 1957, it currently has a market capitalization of $2.2 billion.
Market Share and HPAI Impact
Estimates so far in 2023 are that the 67 largest U.S. egg producers had 328.9 million hens housed on Dec. 31, which is 15.8 million less than the 344.7 million hens reported in the prior 2022 survey.
Cal-Maine Foods Inc (CALM, Financial) is the largest egg producer in the country with a reported 43.9 million layers housed, which is a 6% reduction compared to last year. Rose Acre Farms is estimated to have 25.1 million layers housed, a 9.1% decrease from last year. Hillandale Farms reported 17.8 million layers, a reduction of 11.3% from last year, and remains the third largest U.S. egg producer.
Impact of Bird Flu Outbreak
In late 2022 and into early this year, the country faced a bird flu outbreak, known as highly pathogenic avian influenza (HPAI). The spread of this illness has resulted in approximately 58 million bird deaths since last fall, which is responsible for driving up chicken and egg prices.
The company believes the outbreak will continue to exert downward pressure on the overall supply of eggs, though there has not been an outbreak at a major commercial hen facility in the country since the end of last year. In early 2022, the layer hen flock five-year average from 2017 to 2021 was approximately 328 million hens versus 313 million in March of this year. According to a LEAP Market Analytics report, layer hen inventory is not supposed to exceed 328 million again until January 2024.
Financial Review of Cal-Maine Foods Inc
The company reported strong fiscal third-quarter results recently with net sales more than doubling to $997.5 million compared to $477.5 million in the prior-year period. Net income was $323.2 million, or $6.62 per diluted share, compared with $39.5 million, or 81 cents per diluted share, a year ago.
These results reflect the significantly higher egg market prices and favorable demand boosted by the active holiday season. Conventional egg net average selling price per dozen increased to $3.67 for the third quarter compared with $1.45 in the prior-year quarter.
The net average selling price for specialty eggs rose to $2.61 per dozen, compared with $1.92 per dozen last year. Specialty eggs sold were 35.7% of total revenue compared with 33.1% in the prior-year period. For the quarter, total dozens of eggs sold increased 1.3% to 291.4 million versus 287.7 million in the prior-year quarter, which was driven by higher sales volumes in the specialty eggs category. There is an interesting dynamic where conventional egg prices are higher than specialty egg prices over the past four quarters, which is typically not the case. Specialty eggs include such categories as organic or cage-free.
Valuation and Guru Trades
Cal-Maine Foods Inc (CALM, Financial) is subject to wide swings in earnings based on the current capacity of egg-laying hens and end egg market prices. For the fiscal year ending May 2023, analyst consensus estimates are $16.18, which puts the company trading at an unusual price-earnings ratio of 2.70. However, that level of earnings most certainly will not be repeated and analysts earnings estimates for the following fiscal year ending May 2024 are $5.27. The following fiscal year ending May 2025 will also show another earnings decline.
The company has a unique dividend policy where for each quarter in which it reports net income, Cal-Maine Foods Inc (CALM, Financial) pays a cash dividend in an amount equal to one-third of that quarterly income. Quarterly dividends declared for the past two quarters were $2.20 and $1.35. Annual dividends have ranges from zero cents to 35 cents over the past 10 years. Therefore, the dividend yield currently shown on most financial websites is not a good long-term predictor of future yields.
There are two analysts that cover the company with an average price target of $48, with a high target of $55 and a low target of $39.
Gurus who have purchased Cal-Maine Foods Inc (CALM, Financial) stock recently include Ken Fisher (Trades, Portfolio) and Chuck Royce (Trades, Portfolio). Investors who have reduced or sold out of their positions are Ray Dalio (Trades, Portfolio)'s Bridgewater Associates and Diamond Hill Capital (Trades, Portfolio).
Summary
For those willing to ride price swings inherent in the core business, Cal-Maine Foods Inc (CALM, Financial) may make a solid long-term investment opportunity as it is selling near 52-week lows.
