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]