Cal-Maine Foods (NASDAQ: CALM) shares fell following its Q2 report due to weakness at the top and bottom lines. The weakness was caused by dramatically falling egg prices compounded by an avian flu outbreak. However, as bad as this sounds, investors buy the dip for several reasons. Among them are the fact that this company remains profitable, and the avian flu is a two-edged sword that could drive margin back to record levels.
The USDA reports that avian flu has entered the US egg-laying hen population. The agency has depopulated about 4.05% of the flock since the first of November, and culling is expected to continue. That’s the bad news. The good news is that the hen population is below the five-year average and may fall considerably more before the crisis is past. This will have an upward impact on prices, which is bad for consumers but good news for egg farmers, and for now, Cal-Maine is better positioned than most.
Cal-Maine is the US largest egg producer by volume, nearly doubling the 2nd-largest producer, a position that provides a deep moat for this consumer staple. It is experiencing avian flu but has limited the impact to only 3.3% of its population. Its lower infection rate is due to advanced biosecurity measures and should help contain future outbreaks. Because of this, the company believes it can mitigate its hen losses with flock rotation, putting it in a position to fill voids left by other producers experiencing greater loss.
Cal-Maine had a weak quarter but is profitable
Cal-Maine had a weak quarter due almost entirely to price declines over the past year. The company reported $523.23 million in net revenue for a decline of 35%, missing the consensus by a slim margin. Revenue was supported by a 1.4% increase in conventional egg sales by volume, offset by a 50% decline in average realized price. Specialty egg volume, about 33% of the business, declined by 0.4% and was compounded by a low single-digit decline in average price.
Margin news is also mixed. The company’s margin contracted considerably due to deleveraging and was compounded by legal costs and capital spending. The GAAP $0.35 is down from over $4.00 last year and missed the consensus by nearly $0.50. The takeaway is that the company remains profitable, paid a dividend and should continue to pay dividends for the foreseeable future. Egg prices are down compared to last year but rising sequentially and are expected to remain firm if not increase.
The company doesn’t give guidance but provides ample details to fuel a healthy outlook. A recent acquisition in Utah and another in Missouri will increase the company’s capacity while providing infrastructure to expand existing markets and reach new ones.
Cal-Maine’s dividend is safe
Cal-Maine’s dividend policy ensures the payment is safe; it only pays a distribution when it makes money and has a rock-solid balance sheet. The bad news is that the dividend policy means it doesn’t pay dividends in losing quarters, and there have been plenty of those over the years. The latest results allow for an $0.116 per share payment, which annualizes to about 0.8%. Assuming the company’s margins improve over the coming quarters, that will grow, and we are going into the busiest egg season of the year.
The price action in Cal-Maine fell hard following the report, causing it to gap down at the open. That move was met by buyers who have driven the price back to its opening level and higher. The weekly candle shows a strong signal, a solid doji confirming support at the 30-day moving average, which indicates robust support and a high likelihood the stock price will continue higher. In this scenario, the market could reach all-time highs soon. 
