Following the first quarter 2012 earnings, Smithfield Foods, Inc. (SFD) has been upgraded to Outperform from Neutral.
Smithfield posted improved earnings of 69 cents per share in the first quarter, surpassing the Zacks Consensus Estimate by a penny, which was driven by strong packaged meats earnings in spite of higher raw material costs.
Further, management has undertaken restructuring initiatives in an effort to save costs and boost profitability, which augur well for future operating performance. Smithfield had initiated a cost savings initiative program in the fourth quarter of 2010 to improve the cost structure and profitability of its domestic hog production operations. The initiative will gradually improve the profitability of its Hog Production segment over the next two fiscal years and the benefits of this initiative will be fully realized by fiscal 2014.
Moreover, Smithfield’s vertical integration and product mix also help increase its margins. Gross margins increased 750 basis points (bps) to 14.0% in fiscal 2011 against 6.5% in fiscal 2010, and 900 bps from 5.0% in the fiscal 2009. Smithfield also reported an operating profit margin of 9% in fiscal 2011, up from 0.6% in fiscal 2010 and operating loss in fiscal 2009.
Additionally, Smithfield is making efforts to continue its fresh pork and hog production businesses and expand its packaged meats business through brand activation and innovation, as the company expects strong momentum in its Pork segment. Smithfield also targets a 3% growth in sales volume in the packaged meats business for fiscal 2012.
However, the company’s operations are cyclical and could be adversely affected by fluctuations in the commodity prices for hogs and grains. Though the grains are readily available from numerous sources, grain prices have been subject to fluctuations and have escalated in recent years due to increased worldwide demand. On the other hand, live hogs are the primary raw materials of the Pork segment and the meat processing operations in the International segment. Hog prices tend to rise seasonally as hog supplies decrease during the hot summer months and tend to decline as supplies increase during the fall.
Nevertheless, Smithfield uses advanced management techniques like economies of scale and production methods, together with the use of the advanced SPG genetics, to produce premium quality hogs on a large scale at a low cost. The company also utilizes independent farmers and their facilities to raise hogs produced from the breeding stock. The company also expects to hedge rising hog costs in the mid-to-high $60s per hundred weight for fiscal 2012.
During first-quarter 2012, Smithfield also utilized its excess cash to redeem the remaining $78 million of its outstanding 2011 bonds, repurchase $34 million of stock and invest an additional $100 million in pension plans, besides maintaining over $1.2 billion in liquidity. The company also repurchased $31 million of additional shares and redeemed $13.1 million of its highest coupon bonds in the quarter.
Smithfield, together with its subsidiaries, engages in the production of hog, and processing of pork and beef worldwide. The company offers fresh pork products, packaged meat products, dry meat products and ready-to-eat foods. Smithfield Foods is also involved in turkey production and hatchery operations. The main competitors are Hormel Foods Corp (HRL) and Tyson Foods Inc (TSN).
HORMEL FOODS CP (HRL): Free Stock Analysis Report
SMITHFIELD FOOD (SFD): Free Stock Analysis Report
TYSON FOODS A (TSN): Free Stock Analysis Report
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