What Comes Next — More Profit or Less Eggs?

The largest egg producer in the U.S. increased its net profit by more than 700% in the third quarter of 2022 compared to the third quarter of 2021. Cal-Maine Foods Inc. (NASDAQ: CALM) has seen 42% net revenue growth over the past 5 years compared to 8.3% growth for the industry as a whole, and 4,075% net revenue growth in the past year. Is this a one-off event or will earnings growth continue into the future?

The increase in the price of a dozen eggs is an important factor for the increase in profit. But why such a huge increase in earnings? Also to note, its share prices are down 17% since the start of the year; so what is happening? Although we are in an inflationary period, the price of a dozen eggs has increased considerably more than inflation during this period. Its price per dozen in the last decade was between $1 and $2, while this year it has reached $3.50. This, of course led to a large increase in profits for Cal-Maine Foods as the largest egg producer in the US, with a 19% market share.

Though, can a simple increase in price, boost profits so drastically? Well, here’s the rest of the story: there was an outbreak of bird flu which caused almost 60 million chickens to die. This caused the supply to decrease significantly, and at the same time Cal-Maine Foods is one of the few companies that reported that it did not suffer any contagion from the flu. Therefore, it did not suffer a decrease in production and took advantage of the gap in the market.

Since the price was already affected by inflation, in conjunction with a decrease in egg laying chicken supply, it created the perfect storm for the price to skyrocket. This put Cal-Maine Foods in the best possible position to take the opportunity, which is shown in its largest earnings, starting at Q3 of 2022.

Now, if everything is so in favor of Cal-Maine Foods, why did its stock price peak in December 2022 at $65 dollars per share, and now currently its stock price has fallen back to $46? It is difficult to pinpoint exactly why this is, but on one hand it is believed that avian flu may continue to affect the whole sector and while this time it did not negatively affect the company, some analysts expect Cal-Maine Foods earnings to decline further significantly.

Even so, the company’s financial numbers are quite amazing, with a PER (price-earnings ratio) of just 2.9. The ROE (return on equity) is 49%, meaning that for every $1 of shareholder capital, the company generated $0.49, which is quite high, especially since the rest of the sector has only had an ROE of around 14%. It is quite interesting to see how a company has benefited enormously from the circumstances of the moment, but even so it has not been able to avoid a fall in the company’s stock price. 
As of now, the future of Cal-Maine Foods looks bright, but will the stock recover? This could be just a short term boost or maybe Cal-Maine Foods will manage to sink their claws into this lead they’ve taken in the egg market. Hopefully this egg does not crack.