Cal-Maine Foods, Inc. (NASDAQ:CALM) Held Back By Insufficient Growth Even After Shares Climb 25%

Cal-Maine Foods, Inc. (NASDAQ:CALM) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 85%.

Although its price has surged higher, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may still consider Cal-Maine Foods as an attractive investment with its 9.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Cal-Maine Foods has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Cal-Maine Foods

Want the full picture on analyst estimates for the company? Then our free report on Cal-Maine Foods will help you uncover what's on the horizon.

How Is Cal-Maine Foods' Growth Trending?

In order to justify its P/E ratio, Cal-Maine Foods would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 12,229% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 28% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 10% each year, which paints a poor picture.

With this information, we are not surprised that Cal-Maine Foods is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Despite Cal-Maine Foods' shares building up a head of steam, its P/E still lags most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Cal-Maine Foods' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Cal-Maine Foods (of which 1 is significant!) you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.