Started in 1936 as a small family owned packing plant in Smithfield, VA, this company is now world’s largest pork processor (28% market share) and hog producer (14% market share).

Smithfield Foods conducts its business through two groups, the Meat Processing Group and the Hog Production Group. Some of the popular brands include Eckrich sausage, Farmland bacon, Armour pepperoni and Healthy Ones prepared meals.

Smithfield had suffered losses in 2008 and 2009 as a result of higher grain costs and oversupply of hogs. However the company recovered nicely in fiscal 2011 and posted record high revenue in fiscal 2012.

Of late, the company has put a lot of efforts in improving the packaging and producing healthier choices for consumers using lean protein and natural ingredients.

Smithfield is also increasing its focus on consumer convenience by introducing more ready-to-heat/ready-to-eat foods.

Mixed Fiscal 2013 Second Quarter Results

Smithfield reported its earnings for the second quarter of fiscal 2013 on December 6, 2012.

The company posted better-than-expected adjusted earnings (excluding early debt extinguishment charges) of $0.61 per share, substantially ahead of the Zacks consensus estimate of $0.44 per share.

However, the earnings were down from the prior-year earnings by 19.7% due to sluggish sales and weak margins in hog production business.

During the quarter, Smithfield refinanced high interest bearing debt with new debt at a much lower interest rate and a longer maturity, thus reducing interest expense by 6%.

In the past six quarters, the company has repurchased 28.2 million shares (17% of total) for $576 million and has also reduced it net debt substantially. Further an active risk management strategy has resulted in reducing the cost volatility.

Smithfield is currently trading at 11.12x its trailing 12-month earnings, substantially below industry average of about 16.8x.

Improved Outlook for 2013

We expect better results in the coming quarters in view of rising export demand and lower corn prices. According to some estimates, U.S. corn production could touch record levels this year. Corn accounts for a major part of diet of the hogs raised by Smithfield.

Further, the company expects that heightened environmental and animal welfare regulations in competing countries will support the export demand. Tighter international hog supply conditions and higher prices will further increase the demand for U.S. pork.

Company’s focus on packaged meats will increase the margins going forward. Increased expenditure on advertising will also benefit the company in the longer term. Overall, we are quite positive on the outlook for the company.