Cal-Maine Is Down, But Specialty Eggs Give Shareholders Upside

• Cal-Maine Foods Inc CALM shares have lost 8 percent since June 29, declining sharply by over 9 percent over the last 5 trading days.
• Stephens’ Farha Aslam maintained an Overweight rating on the company, with a price target of $65.
• Aslam believes that the pullback in shares after the company reported disappointing F1Q16 results offers a good buying opportunity.

Cal-Maine reported its F1Q16 operating EPS at $2.95, missing the Stephens estimates by $0.20 and the consensus expectations by $0.19. The underperformance was mainly on account of higher-than-anticipated egg purchasing costs.

Analyst Farha Aslam mentioned that the company’s earnings and dividends in F2016 would be should supported by higher egg prices on account of tight supply, in view of “the outbreak of avian influenza last spring, a positive mix shift towards higher priced specialty eggs, and benign grain prices.”

The EPS estimate for F2016 has been reduced from $13.00 to $12.80, to reflect the underperformance in the first quarter.

Cal-Maine witnessed elevated demand for specialty eggs. Aslam said that the increase in company-produced specialty eggs is a “long-term positive for sales and earnings,” since specialty eggs can be sold at higher prices, with premium margins, and tend to be more stable than regular eggs.

Cal-Maine’s shares plunged 11-12 percent on news of the earnings miss. “The stock tends to be volatile around earnings and we would view the pullback as a buying opportunity,” the analyst wrote.

In the report Stephens noted, “The Company is well positioned to deliver strong earnings growth, pay a substantial dividend, and expand earnings power via organic capacity expansion, mix improvement and M&A.”