Smithfield Expands Meat Business

In order to help grow its packaged meats business, the pork producer Smithfield Foods, Inc. ( SFD - Analyst Report ) has agreed to form a 50:50 joint venture and has signed a letter of intent with Kansas City Sausage Co. and its sister company Pine Ridge Farms. However, the company has not disclosed its terms yet.

Kansas City Sausage is a leading U.S. sausage producer and sow processor and produces premium raw materials for sausage, as well as value-added products, including boneless hams and hides. Smithfield’s cash deal with Kansas City is expected to close in the fourth quarter of fiscal 2013 and will be immediately accretive to earnings.

The deal will help the company to expand its portfolio in the breakfast and dinner sausage categories, which generate annual sales of more than $4 billion. In addition, the efficient operations of Kansas City Sausage as well as its low-cost products will provide a platform for Smithfield’s brands to grow efficiently. Thus, the deal will bring together Kansas City’s expertise in sow processing with Smithfield's portfolio of leading consumer brands adding to the sales.

Smithfield is scheduled to report its third quarter fiscal 2013 results on Mar 7, and the company expects packaged meat margins to improve in the third quarter, driven by product mix and increased marketing of its core brands. For fiscal 2013, the company expects packaged meat margins at the high end of the normalized range with 2–3% volume growth. The company has bright prospects ahead as it expects hog prices and the impact of grain costs to ease in the coming quarters.

Smithfield’s results have been suffering since last two or three years as a result of higher grain costs and oversupply of hogs. However, the company has posted record revenues in fiscal 2012, backed by the company’s brand building investments and innovation, restructuring initiatives, improved packaging and production of healthier choices for consumers using lean protein and natural ingredients.

Smithfield is also increasing its focus on consumer convenience by introducing more ready-to-eat foods. Increased export volume of fresh pork is also encouraging and we expect strong demand of fresh pork in the upcoming quarters.

Smithfield holds a Zacks Rank #1 (Strong Buy). Other attractive stocks worth considering are Tyson Foods Inc ( TSN - Analyst Report ) and Hillshire Brands ( HSH - Snapshot Report ) , both holding a Zacks Rank #1 (Strong Buy), and Hormel Foods Corp ( HRL - Analyst Report ) carrying a Zacks Rank #2 (Buy).