Why Investors Shouldn't Be Surprised By Cal-Maine Foods, Inc.'s (NASDAQ:CALM) Low P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Cal-Maine Foods, Inc. (NASDAQ:CALM) as a highly attractive investment with its 8.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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.

How Is Cal-Maine Foods' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 19% during the coming year according to the two analysts following the company. That's not great when the rest of the market is expected to grow by 15%.

In light of this, it's understandable that Cal-Maine Foods' P/E would sit below the majority of other companies. 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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Cal-Maine Foods (1 is a bit concerning!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.