Was the Cal-Maine Earnings Report Misunderstood?

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Cal-Maine Foods, Inc. (NASDAQ: CALM) is one of the few companies that has a lot of opportunity, and a lot of risk, around the price of eggs in the aftermath of the avian flu outbreak that was in the news earlier this year. It turns out that Cal-Maine may not be as big of a winner as at least some investors were hoping. Still, shares did not remain as negative as they were earlier in the day after the realization that Cal-Maine also had the highest annual net income in its operating history.

Government data had kept a degree of anticipation elevated for this report. The most recent Consumer Price Index (CPI) report from the Labor Department showed that egg prices were up by a whopping 18% or so in the month of June, which was the biggest price hike in over 40 years.

The company’s fourth quarter was simply not as good as analysts were expecting, and this has some wondering whether or not the jump egg prices will really help the company. Cal-Maine reported $0.95 in earnings per share was under the $1.04 expected by Thomson Reuters. Also, revenue of $403 million was almost $15 million short of expectations. The company’s notation might have highlighted that disappointment:

Sales for the fourth quarter were up 8.5 percent over the prior year, reflecting a 6.2 percent increase in total dozen shell eggs sold and 2.6 percent higher average selling prices compared with the fourth quarter of fiscal 2014.

Some guidance concerns also came up after the company commented about an ongoing expansion. Cal-Maine’s earnings report said:

For fiscal 2015, sales of specialty eggs accounted for 19.8 percent of our total number of shell eggs sold and 27.2 percent of our shell eggs revenue. With the growing consumer demand for specialty eggs, we have also pursued additional opportunities to further enhance our product mix and offer a wide variety of healthy choices. In April, we announced a new production joint venture in Texas with Rose Acre Farms to build a state of the art shell egg production complex with capacity for approximately 1.8 million cage-free laying hens. Construction of the complex has commenced, and the initial flocks are now expected to be placed in November 2015.

Cal-Maine also announced with earnings that it would pay a dividend of approximately $0.317 per common share. When there is net income, the company pays a cash dividend equal to one-third of such quarterly income. Also, no dividends are paid in a quarter if the company does not report net income.

Cal-Maine shares were last seen down only 1% at $53.33 with just over an hour until Monday’s closing bell. That is handily better than when shares opened down at $50.50 earlier on Monday morning, which was down 6.3% from the $53.89 closing price on Friday. Cal-Maine shares have a 52-week range of $34.03 to $60.72, and the consensus price target is up at $65.57.

Below was the company’s quoted commentary on the avian flu and how it has impacted prices and how the company is handling it:

The recent outbreaks of Avian Influenza (AI) in the upper Midwestern United States this spring have had a significant impact on our industry. Due to the outbreaks, it is estimated that the national flock has been reduced by over 40 million laying hens and pullets, or approximately 13 percent. As a result of the reduced supply, egg prices have moved significantly higher in recent months. While the warmer summer months seem to have reduced further transmission of AI, egg prices are expected to remain high until the national laying hen flock can be replenished.

There have been no positive tests for AI at any of the Cal-Maine Foods locations. However, we have significantly increased our biosecurity measures at every location, and we continue to monitor the situation every day. We are also working closely with the egg industry associations and government health officials to identify ways to mitigate the risk of future outbreaks.

While AI has created uncertain market conditions for our industry, we remain focused on managing our operations as efficiently and safely as possible… We are well positioned to leverage the additional capacity from our recent joint ventures and other expansion projects underway in Florida, Kansas, Kentucky and Texas. Our strong balance sheet also provides the flexibility to pursue new growth opportunities that will improve our operations. And, we will continue to execute our growth strategy to enhance our product mix, including additional opportunities to market and sell specialty eggs…

Sometimes what appears to be bad news just is not as bad after investors get to look closer at the real results.