Good day to you all.
Here is my back-of-napkin earnings estimate for Cal-Maine Foods, Q2, FY 2017.
The underlying business of Cal-Maine remains the same from Q1 to Q2 (ending this month). This includes feed costs, selling and administrative, and jet fuel, if Cal-Maine owns a jet. It is highly likely that some things are materially different, but we could only guess what, and therefor won’t bother.
This analysis is based upon what we here in the northeast have paid for shell eggs. Cal-Maine is selling them for less than we are paying. I assume that CALM commands a price at least 4-6¢ less, which will likely overstate earnings in this analysis; but I wish to err on the side of optimism as CALM seems to me very well run. I would never be surprised by an upside surprise.
Eggs remain cheap. Really cheap. Remarkably cheap.
The Holiday Effect:
1. Regarding price; the average price of eggs for the last three weeks of October compared to the first three weeks of November (the start of the holiday baking season):
2013- up 24% ($1.13- $1.40)
2014- up 33% ($1.18- $1.57)
2015- up 32% ($1.51- $2.00)
2016- up 11% (.54- .60)
…but there is more; last week, the third week in November, the price of eggs went down from 60¢ to 52¢. That is, to say the least, indicative of something different. You can spell it o-u-c-h.
2. Regarding volume; Q2 sales are consistently about 50% higher than Q1 sales, due to the seasonal effect of Thanksgiving.
3. Additionally, as gleaned from CALM filings, while value added eggs trend in price with conventional eggs; they seem to bottom at $1.95. Let’s assume that’s the floor for this exercise.
4. Average egg prices (we paid); 52¢ in September and October, 60¢ and declining in November. Remember the quarter ends in about two weeks, so we are erring on the side of generous.
A Valuation Guesstimate
Looking back to Q1 (ending in August), egg prices were already broken.
I’ll use that information as a basis for Q2. In Q1 we paid an average of .52/dozen; CALMs 10-Q says they got .62/dozen.
I take that as either the tail end of contracts maintaining a higher price for CALM, or quarter results bleeding over. I've looked at other 10-Qs and I believe that to be the case. Prices always catch up.
For Q2, we’ve paid an average of 54¢, so let's guess CALM got 50¢/dozen.
In Q1, at 62 cents/dozen, CALM lost $49 million shells, before tax benefits; $30MM after taxes, etc. on sales of 242MM dozen eggs.
Cost of goods divided by dozens sold is $1.03. This is much lower than history and I’m going to guess that it’s a bookkeeping anomaly of some sort; perhaps inventory. Annual average CoS/Dozen for FY ’16 was $1.20; for FY ’15; 1.11. I can’t imagine a reason why it would be so much lower, or lower at all. Beware. This could result in a very large surprise, to the upside or the downside. One penny in additional per dozen cost equals a net change of $3.5MM (4-5¢/share).
Per past performance: If they sell 50% more this quarter than Q1, that’s 275MM dozen conventional and 83MM dozen value-added, about an 80%/20% split, conventional vs. value-added. (Value-added is a rising percent, however).
Revenue of 50¢ per dozen on conventional = $138MM gross sales
$1.95 on value-added = $162MM
Total $300MM gross profit
1.03 cost per dozen sold is $309MM; best case is $9MM in operating income
If the average dozen cost is the low historical $1.10-ish; that’s $330MM; a $30MM operating loss.
This is the edge of my comfort zone, since my accounting skills and/or time available don’t allow me to evaluate other items; income tax benefits, equity in income from affiliates, and other material adds and subtracts. It appears likely that benefits from royalties, non-controlling interests, etc. will make matters worse. But what the heck; assume 35% tax (benefit) and everything else the same as it was in Q1:
If CALM pulls a $9MM profit, plus other income of 1.3MM; gross profit is $10.3MM. After taxes we’d have net income of $6.7MM. With 48,000 shares outstanding, that’s 14¢/profit.
If CALM loses $30MM, the net after tax loss would be about $11mm; a loss of 23¢ per share.
Looking at TTM earnings, FY’16 Q2 EPS were $2.26. If CALM nets a 14¢ profit; TTM earnings are 82¢. At a (extremely generous) 20x earnings, CALM is a $16 stock. If CALM loses 23¢; TTM EPS are 45¢; a $9 stock.
The dividend policy states that until profits are recouped from past losses, there are no dividends. It seems extraordinarily unlikely that Q2 will have a dividend, as the loss per share was 64¢ for Q1. If egg prices do not revert to the mean, there will be no dividend in Q3 either.
That is the risk end of things. If conventional eggs return to the $1/dozen range, I’ll be sure to let you know. CALM can make money there and it will change the calculus for the better. It definitely can't happen in Q2. There is currently nothing to indicate that it will ever happen, except of course past history.
Stay tuned. [more]
Caution on CALM. I'm working on another "napkin estimate," but here are the underlying facts that should give you pause:
The average egg cost in Q4 '15 was $1.48. In Q4 '16, 69¢. Not surprisingly, CALM reported a loss for the quarter.
I haven't had enough time to pay much attention to the (stock) market lately, so I grabbed a cheat from the Market Realist. While I will assume the numbers they offer are correct for the recent past, I can say with certainty that their report does not reflect current reality.
Two things cause me great worry; Q4 egg prices as reported by CALM were down 22%. The actual egg market was down 53%. What this tells me is that CALM did not fully participate in the overnight rise in egg prices last May. This is not entirely surprising, but it is a good thing to know; CALM lacks a certain amount of pricing power.
The second thing is this little tidbit: egg prices in Q1 to date. 2015; $2.07. This year: 59¢. Note that 59¢ is significantly less than 69¢, and at 69¢ CALM lost money. The second and a half thing; egg prices actually went up for a couple of weeks. But, uh...last week they were 48¢. There is only a month left in this quarter, so I'm going to be optimistic and suggest that the full quarter average egg price will be about 60¢ vs. last year when they were $2.24.
A most valuable lesson, one I rarely (actually never) have had is access to "(not really) inside information," which I can use to evaluate what is being written by very smart people who are evaluating this stock. Either they aren't paying attention to Urner-Barry, which is a no-brainer, or they have a pernicious agenda. For anybody to suggest that CALM might be a good buy here is extremely ignorant of the basic facts I have offered up.
To those in search of a decent dividend, perhaps (probably) many have stuck with CALM to "see what happens." After all, this is not the first time they've not paid a quarterly dividend. But I predict a second losing quarter, and again no dividend. At some point in the next few months, people will be fleeing from this stock.
I promise more detail and an actual earnings prediction when I can find time. But I can predict with great conviction a losing Q1.
who is going to buy CALM again...but not for a while. [more]
Perhaps chicken is soon to become cheep (pun). There is in fact a glut of eggs; methinks due to the strong dollar which equals poor exports.
Over the past six weeks, egg prices have averaged 43¢/dozen. When were they last so low? Never...or at least never in the ten years that my records go back. It gets uglier; they were 38¢ for three of the past four weeks, before popping all the way up to 50¢ this week. For further context, the next lowest price in my records was 60¢ in June of 2009. These are prices for large eggs, which is where most of the action is. Medium eggs were 28¢/dozen. I doubt that that'll pay for the ink on the carton.
Here, let's interject the average egg price for CALM Q4, to be reported some time in July:
in 2015, March through May, the average price was $1.48
in 2016, March through May, the average price was 69¢
Can you say "ouch?"
What does this mean for CALM profits? It's really hard to say since CALM has been building the value-added business of cage free and Egg-lands. It should allow us to get a pretty clear picture of just how dynamic the value added portion on the business has become. If CALM can pull off a profit in this environment, they will have clearly left the commodity side of the business behind. I personally don't think that is likely, but hey, you never know.
On a brighter note, it's possible that CALM can pick up some new business from Costco, which stands behind their assertion that Hillandale brand eggs are good. If you haven't seen the latest undercover video of conditions at a Hillandale farm, check it out. Gross. Hillandale is owned by Jack DeCoster, who could reasonably be characterized as an "egg-criminal," having been previously convicted of same. He says he has nothing to do with Hillandale, but that's what we'd expect an egg-criminal to say. Costco should leave them like a Ukrainian mail order bridegroom. I think CALM is the only outfit who might be able to manage Costco demands.
All y'all enjoy the fruits of the situation, while it lasts! [more]
Hello CALM fans and non-fans alike:
Just to keep you up on what's up with our friends in the coop...egg prices are returning to the three year trendline. They turned up slightly ahead of schedule, but are otherwise parallel.
I'm going to sketch out a back of the napkin suggestion for earnings, (rounding to nickels along the way)...
First, our favorite gang of know-nothings (analysts) are predicting earnings of $3.00/share. I will posit without reservation that EPS of $3 are entirely unlikely.
In this as-yet-unreported Q4 (ending November 30, reporting in Dec.):
The first two months, eggs were at what I'll call "Stupid High prices" (SH), with one month at more "Normal Prices" (NP). Additionally, the middle month was trending toward normal, with the 3rd remaining a little higher than normal.
For estimating SH, I'll use last quarter earnings of $3.00 (three full months of SH prices) as a benchmark; $1/month EPS.
For estimating NP, earnings for the quarter a year ago were 75¢; so 25¢/month EPS.
This suggests roughly $2.25 EPS for Q4 (2x SH + 1x NP)...nowhere near $3. Giving myself maximum mushiness, plus about 10% organic EPS growth (which I'd expect), I'm going to suggest an earnings range of $2.25-$2.50. Of course it does not incorporate anything that I can't really know (which is almost everything, actually).
At a current P/E multiple of 10-ish and TTM EPS of $6.50, we get a stock price of $65. That would be my short term high target.
In the new fiscal year (2016) which begins in December:
With 10% growth over Q1 2015, TTM will increase to $6.60; a $66 stock at a P/E of 10. If irrational optimism expands the multiple to (a very possible) 12x, that puts it at $78.
So bearing in mind that earnings are drifting back to NP:
a 10% increase in EPS for Q1 2016 are likely, but a repeat of Q3 and Q4 are entirely unlikely. Remember that Q2/2015 had two months NP and one month SH, so Q2 is a crap shoot...but rest assured that the "market" won't remember facts that it never recognized in the first place. I doubt earnings will grow YoY for 2nd quarter.
If CALM were to maintain a 10% earnings growth in the core business:
FY 2014 earnings were $2.90 so x 1.1 = 3.20 EPS. At the 10 multiple, that's $32. There is your risk/reward scenario;
a price range of $32-$78.
And one can scarce imagine the market reaction when Q4 earnings come in 50¢ below analysts estimates! Those of you who are traders may find this a compelling situation.
What am I doing? I have a sell order at $68 for the entirety of my holdings, but may adjust to a lower number ($65-ish) as the earnings announcement nears. My blended share cost is $24.
If you want to follow along, http://www.ams.usda.gov/mnreports/pybshellegg.pdf
The chart at the bottom of page one is all we really can or need to know.
Happiest of Thanksgivings to you all.
To see more discussion, check out the Value Hounds discussion board:http://boards.fool.com/calm-hitting-stride-31530191.aspx [more]