Categories AlphaGraphs, Analysis, Retail

Can Cal-Maine (CALM) bet on specialty egg biz to ease pricing issues in Q2?

After a difficult summer season, marked by significant pricing pressures that weighed on profitability, Cal-Maine Foods (NASDAQ: CALM) will be reporting second-quarter results on January 6 before the opening bell. In a sign that the negative market conditions persisted in the November-quarter, analysts forecast a 94% fall in earnings to $0.03 per share on revenues of $324.07 million.

The Jackson, Mississippi-based company, a leading producer and marketer of shell eggs in the country, has been expanding its specialty egg business consistently to drive growth. In the most recent quarter, this segment accounted for about a fifth of the total sales volume.

Pricing Woes

Unfavorable pricing conditions will continue to be a drag on margins in the to-be-reported quarter, primarily due to the oversupply of eggs. Also, there has been a steady increase in labor costs and expenses related to flock rotation. Meanwhile, liquidity might come under pressure from the ongoing investments in expansion initiatives. The second-quarter performance is estimated to have been negatively impacted by economic uncertainties and the Sino-US trade dispute.

Q1 Loss

For the first quarter, Cal-Maine reported a wider-than-expected loss of $0.94 per share, even as revenues fell sharply to $254.5 million and missed the estimates. The dismal results triggered a stock sell-off that dented the company’s market value by several million dollars.

Also see: United Natural Foods: Q1 2020 Earnings Snapshot

A couple of days ago, brokerage firm ValuEngine downgraded Cal-Maine’s stock to buy from strong buy, citing the negative market conditions and headwinds to margin growth.

Mahard Deal

In November, Cal-Maine closed the previously announced acquisition of certain assets of Mahard Egg Farm, in a deal that complements its plan to expand the business through acquisitions. The strategy, combined with the management’s continued focus on expanding the existing business, bodes well for the company as far as long-term growth is concerned.

The Stock

Of late, there has been skepticism among investors about the stock’s future, after the unimpressive earnings performance in recent quarters and the mid-year dividend-cut. The stock closed the last trading session at $42.75, broadly at the levels seen a year ago. It witnessed a high level of volatility throughout last year.

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