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Meat producer Smithfield Foods Inc posted earnings of 21 cents per share in the fourth quarter of fiscal 2013, missing the Zacks Consensus Estimate of 42 cents by 50.0%. The results also lagged the prior-year earnings (excluding Missouri litigation benefits) of 43 cents by 51.2% due to weak margins in the hog production business and decline in pork exports.

The continued rise in grain costs after the 2012 draught resulted in a sluggish hog production business. Pork exports also declined due to a fall in shipments to China and Russia. The requirement of a new ractopamine (animal drug) certification in China slowed down the exports, which picked up later in mid-March. Exports in Japan suffered due to depreciation of yen against dollar.

During the quarter, total sales increased 3.0% year over year to $3.32 billion, driven by strong momentum in packaged meat business. Total sales also beat the Zacks Consensus Estimate of $3.28 billion.

Operating profit declined 52.7% to $72.9 million during the quarter due to higher raising costs, which impacted both the hog production business and the international segment. Operating margin declined 300 basis points to 2%. Weak hog production and international segment margins overshadowed the improved margin of the pork segment.

Category Details

Pork: The Pork segment mainly consists of three wholly-owned U.S. fresh pork and packaged meat subsidiaries. Sales in the Pork segment increased marginally by 0.9% to $2.8 billion compared with the previous-year period.

Fresh Pork: Sales of fresh pork slipped 4.8% to $1.18 billion due to decline in shipments. However, operating margin increased 100 basis points to 2% due to decline in live hog prices.

Packaged Meat: Sales of the packaged meat business increased 5.6% to $1.57 billion, while operating margin was flat year over year at 7%.

Segment sales were driven by solid volume growth across a number of key product categories, core brands and all trade channels. The segment also witnessed improved market share in cooked dinner sausage, dry sausage, ham steaks and marinated pork and double-digit growth in its Eckrich cooked dinner sausage, Armour dry sausage, Smithfield and Farmland marinated pork. The company also expanded distribution in the bacon, deli meats, dry sausage, hot dogs, packaged lunchmeat, portable lunches and marinated pork categories.

Hog Production: Hog Production sales increased 10.4% year over year to $834.4 million in the fourth quarter of fiscal 2013 as the company's risk management strategy mitigated losses in the quarter. The segment’s operating margins were however disappointing at negative 5% compared to a margin of 5% in the prior-year quarter due to higher raising costs.

International Segment: The segment reported an 8.8% increase in sales to $370.0 million in the reported quarter, despite higher raw material costs and macro-economic headwinds. On a constant currency basis, sales increased 6% led by higher volumes in Poland and price increases in Romania. However, segment operating margin declined 400 basis points to 2% in the quarter due to higher raising costs.

Fiscal 2013 Results

Smithfield reported adjusted earnings of $1.80 per share in fiscal 2013, which declined 30.5% from the prior-year adjusted earnings of $2.59 per share. The results also missed the Zacks Consensus Estimate of $2.00 per share by 10.0%. Continued weak margins in hog production business due to higher feed costs led to the decline in fiscal 2013.

During the year, total sales increased 1.0% year over year to $13.22 billion, driven by strong momentum in packaged meat business. Total sales also beat the Zacks Consensus Estimate of $13.14 billion.

The company achieved volume growth in 8 of the 12 core brands, with double-digit growth in its Smithfield bacon, Armour dry sausage, and Smithfield and Farmland marinated pork. Smithfield also gained market share in the bacon, dinner sausage, dry sausage and marinated pork categories, and was able to expand the distribution of its core brands in a number of key product categories in fiscal 2013.

Merger Details

On May 30, Smithfield Foods agreed to its buyout by Hongkong-based meat processor Shuanghui International Holdings Ltd. for $7.1 billion, including debt. Per the deal, Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share in cash, once it receives shareholder and related federal regulatory approvals. The deal is expected to close in the second half of fiscal year 2013.

The deal will allow Shuanghui, which is a leading pork producer in China, to meet the growing demand for pork in the country by gaining control of Smithfield’s brands, such as Smithfield, Armour and Farmland that meet food safety standards. We believe the deal is also a strategic fit for Smithfield as it will be able to expand its footprint in China taking advantage of Shuanghui's solid distribution network.

Smithfield has been under pressure to improve its business since the past few years. Smithfield’s results have been suffering since last the few years as a result of higher grain costs. In addition, oversupply of hogs resulted in lower hog prices, which along with higher grain costs led to margin declines. Smithfield is also uncertain about the performance of its Hog Production segment in the upcoming quarters.

Smithfield currently holds a Zacks Rank #3 (Buy). Some other meat producing companies include Pilgrim’s Pride Corp. (PPC - Snapshot Report) and Sanderson Farms (SAFM - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy). Another company in the consumer staples sector currently performing well is Flower Foods Inc. (FLO - Snapshot Report) with a Zacks Rank #1 (Strong Buy).

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