Little Excitement Around Cal-Maine Foods, Inc.'s (NASDAQ:CALM) Earnings

With a price-to-earnings (or "P/E") ratio of 4.8x Cal-Maine Foods, Inc. (NASDAQ:CALM) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 32x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 3 warning signs investors should be aware of before investing in Cal-Maine Foods. Read for free now.

With earnings growth that's superior to most other companies of late, Cal-Maine Foods has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out 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.

Is There Any Growth For Cal-Maine Foods?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Cal-Maine Foods' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 256%. The strong recent performance means it was also able to grow EPS by 5,253% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 40% during the coming year according to the three analysts following the company. Meanwhile, the broader market is forecast to expand by 13%, 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Cal-Maine Foods maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Cal-Maine Foods (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

You might be able to find a better investment than Cal-Maine Foods. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.