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November 2015



Eggs on a Napkin

November 21, 2015 – Comments (0) | RELATED TICKERS: CALM

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,
The chart at the bottom of page one is all we really can or need to know. 

Happiest of Thanksgivings to you all.


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