On Monday, Goldman Sachs adjusted its outlook on Cal-Maine Foods (NASDAQ:CALM), increasing the stock price target to $47.00 from the previous $42.00, while continuing to advise a Sell rating on the stock. The revision comes as the firm anticipates higher egg prices and a decline in feed costs to positively impact the company's earnings for the third fiscal quarter of 2024 (FY3Q24).
In preparation for Cal-Maine Foods' upcoming earnings report, Goldman Sachs has revised its earnings per share (EPS) estimate for the company, raising it to $2.90 from the prior estimate of $1.39. This new estimate stands significantly above the Refinitiv consensus of $1.61. The adjustment reflects the current market conditions, including the uptick in egg prices that Cal-Maine Foods is likely to benefit from in the short term.
Despite the positive short-term outlook due to increased egg pricing, Goldman Sachs expresses caution regarding the sustainability of these excess profits. The firm points out that the market may be overvaluing the temporary gains linked to the Highly Pathogenic Avian Influenza (HPAI) outbreak, which are not expected to last through the business cycle.
The analyst notes that Cal-Maine Foods' shares have risen approximately 32% since reaching lows in October, a surge attributed to the HPAI-driven supply shocks and heightened retail demand. These factors, however, are seen as short-term tailwinds that do not necessarily indicate sustained higher earnings.
The investment firm also comments on the risk/reward balance for Cal-Maine Foods, deeming it unfavorable at the stock's current valuation levels. The valuation implies a premium over the company's excess cash balances that exceeds what is warranted by its normalized return on invested capital (ROIC) and return on equity (ROE). Despite the near-term earnings boost, Goldman Sachs maintains a cautious stance on the stock's long-term valuation.
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