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Smithfield Foods Inc. posted adjusted earnings of 76 cents per share for the second quarter of fiscal 2012, which surpassed the Zacks Consensus Estimate of 69 cents by 10.1%.

The record increase in proforma earnings for the quarter was driven by strong fresh pork earnings and double-digit exports in spite of higher raw material costs.

GAAP earnings were reported at 74 cents per share, down by 14.0% from the net earnings of 86 cents per share in the year-ago quarter. The results include a charge for early extinguishment of debt of 2 cents per share.

Quarterly Sales Details

During the quarter, total sales recorded a decent year-over-year increase of 10.0% to $3.3 billion from $3.0 billion in the prior-year quarter. The improvement was primarily attributed to higher average unit selling prices in the Pork segment. Total sales exceeded the Zacks Consensus Estimate of $3.2 billion.

Segment and Margin Details

Pork: On a reported basis, sales of the pork segment recorded a robust 12.0% growth from the previous year to $2.8 billion. The improvement was fuelled by a 18.4% growth in the fresh pork section and a 6.9% growth in packaged meats.

Operating profit in the pork segment decreased 9.4% to $171.2 million in the second quarter of 2012. Operating margin also declined by 2% to 6% in the quarter, on the back of lower margins in the packaged meat sections and a flat margin in the fresh pork section.

Operating margin in Fresh Pork decreased year over year to 7% in the quarter, as a result of a 22% increase in live hog market prices which had more than offset a 14% improvement in the USDA pork cutout. Results were bolstered by stable domestic supplies and solid exports.

Operating margin in Packaged Meat remained flat at 5% in the quarter, experienced by an increase in raw material costs. Core brands’ volume increased 5%, driven by growth in key number of products, including bacon, hams, and sausages.

Hog Production and International: Hog Production posted a decent year-over-year growth of 11.1% to $785.3 million. The segment’s operating margins came down from the prior-year quarter to 8%, owing to higher live hog market prices and pre-interest raising costs.

International segment also reported a sales growth of 18.7% in the second quarter of 2012. Operating profit in the International segment was down, on the back of recessionary conditions coupled with higher raw material prices.

Other Financial Details

During the quarter, Smithfield has utilized its excess cash to redeem $115 million of long-term bonds year to date and repurchase $111 million of stock.

Outlook

The company announced that it is working hard to maintain its hog production business, and expects to see better results in the International segments. The company has seen strong momentum in its Pork segment supported by solid brands and positive industry fundamentals. Therefore, Smithfield targets a 3% sales volume growth in the packaged meats business in fiscal 2012.

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.

Management has undertaken restructuring initiatives in an effort to save costs and boost profitability, which augur well for future operating performance. Further, the company’s vertical integration and product mix help increase margins. We maintain our long-term recommendation on Smithfield at Outperform, while the company has a Zacks #1 Rank, implying a short-term Strong Buy rating.

However, intense competition from other established players and cyclical nature of the company’s operations undermine its future growth prospects and profitability. The main competitors are Hormel Foods (HRL - Analyst Report) and Tyson Foods (TSN - Analyst Report).

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