Consumers may welcome cheaper eggs, but for producers like Cal-Maine (CALM), falling prices could scramble future profits. The nation’s largest egg distributor has thrived during supply shocks but now faces skepticism as conditions normalize. In today’s FA Alpha Daily, we explore whether this market leader can sustain its outsized returns and why the outcome matters for investors.
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Eggs are a staple in the American diet, with the average consumer eating up to 284 eggs per year.
As such, disruptions to the supply of eggs have a profound effect on consumers. People immediately recognize when the price of eggs is on the rise, as has been the case for recent years.
In 2022, a fatal and highly transmissible strain of bird flu swept through chicken populations around the country, forcing farmers to kill more than 100 million egg-laying hens in total over the past three years.
Given the fact that hens take months to mature and begin laying eggs, shortages have been hard for companies to quickly rectify. These shortages have resulted in rising egg prices, and in some instances limits on how many eggs a single person can purchase at stores.
In 2021, a dozen eggs cost on average $1.67. In 2022 prices peaked at over $6. And today, while hen populations have recovered and egg prices stabilized, a dozen eggs still costs more than $3.5, well above 2021 levels.
Since 2022, farmers have contended with a fatal and highly transmissible strain of bird flu, leading to volatile supply and prices.
While volatile supply and rising prices have hurt consumers, Cal-Maine Foods (CALM) has benefitted. Cal-Maine is the largest egg producer in the world, accounting for 20% of the eggs consumed in the U.S. Annually, it sells over a billion dozen eggs.
Due to its market position and size, Cal-Maine has been the primary beneficiary of recent price increases.
Cal-Maine’s Uniform return on assets (“ROA”) has risen from 6% in 2020 to 45% in 2023. While returns dipped in 2024, the company’s ROA surged to 58% this year while achieving a Uniform asset growth of 17%.
Although peak results are unsustainable for the cyclical company, Uniform Accounting highlights that investors may be underestimating Cal-Maine today. The company currently trades at a 6.4x Uniform P/E, below corporate averages and historical levels.
At these valuations, the market believes the company’s returns will fall back to 9%, near pre-flu levels.
However, while egg prices have come down, they are still elevated compared to historical averages. If Cal-Maine can maintain its cost leadership and effectively navigate supply dynamics in the coming years, its mid-cycle returns could exceed both past performances and market expectations.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
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