Cal-Maine Downgraded At Stephens: Here's Why

• Cal-Maine Foods Inc CALM shares are up 13 percent since July 21, even after hitting a low of $47.50 on August 24.
• Stephens’ Farha Aslam downgraded the rating on the company from Overweight to Equal-Weight, while establishing a price target of $65.
• Following the recent appreciation, the company’s shares already reflect robust demand for eggs, contained input costs and an improving product mix, Aslam said.

Cal-Maine’s shares have risen 12-13 percent in the last three months, and are now trading within 3 percent of the price target. The appreciation reflects “optimism that CALM's earnings should benefit from solid demand for eggs, benign input costs and an improving product mix,” analyst Farha Aslam mentioned.

Aslam pointed out that it is difficult to predict the top or bottom for protein stocks, and that the downgrade could be “premature,” in view of the company’s strong balance sheet. “That said, we believe that F2Q16 EPS consensus estimates are high given current egg prices,” she added.

“Egg prices have declined sequentially, reflecting inventory hitting the market that had been held back as prices increased in August and lower promotional activity at retail given the high price of eggs,” Aslam wrote.

The Stephen report added that the US is now exporting fewer eggs and importing more product from Mexico and the EU.

The Stephens egg margin averaged $0.95 per dozen in the most recent week, higher by $0.23 than the year-ago period. Margins are significantly above year-ago levels since late May, when egg prices were boosted by the outbreak of HPAI in several key production states.

A decline in grain costs, on account of last year’s good harvest, has also boosted profits. “However, we would note that margins have ticked down sequentially reflecting the drop in egg prices,” Aslam added.

The EPS estimate for F2016 has been reduced from $12.80 to $12.15, to reflect lower-than-anticipated egg pricing. The EPS estimate for F2017 has been reduced from $9.10 to $8.55, reflecting reduced feature activity.