Earnings Scorecard: Smithfield

Smithfield Foods Inc.(SFD - Analyst Report) announced its financial results for the second quarter 2012 on December 8.

Earnings Review

Smithfield 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%, driven by strong fresh pork earnings and double-digit exports in spite of higher raw material costs. However, it lagged the prior-year quarter earnings of 86 cents.

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.

(Read our full coverage on this earnings report: Smithfield Exceeds Estimates).

Agreement of Estimate Revisions

Following the trend to outperform its estimates, the analysts believe that the company has the potential to exceed its estimates for the two upcoming quarters as well as fiscal years 2012 and 2013.

Out of the 14 analysts covering the stock, 9 have revised their estimates upward for the upcoming quarter over the past 7 days, while only one of the analysts showed a negative trend. Similarly for the fourth quarter of 2012, 9 of 14 analysts increased its estimates, with none lowering their estimates over the same period.

Likewise, for the fiscal 2012 and 2013, 12 out of 15 analysts increased their estimates over the past 7-day period, and 9 out of 14 analysts moved up their estimates, respectively. None of the analysts lowered their estimates.

We believe that robust pork earnings and strong exports will continue in the upcoming quarters. Further, management has undertaken restructuring initiatives in an effort to save costs and boost profitability, which augur well for future operating performance. The company’s vertical integration and product mix also help increase margins. Though rising raw material costs will continue to challenge Smithfield in future, the company is attempting to continue its fresh pork and hog production businesses and expand its packaged meats business through stronger branding and innovation.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the third quarter of 2012 has increased by 9 cents to 62 cents per share. For the fourth quarter of 2012, the estimates also spurted up by 9 cents to 56 cents per share. The estimates for the fiscal year 2012 rose from $2.42 to $2.61 per share, while they climbed from $2.63 to $2.77 per share for fiscal 2013 over the last 7-day period.

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.

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).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

Read the full analyst report on TSN

Read the full analyst report on HRL

Read the full analyst report on SFD