We reaffirm our Neutral recommendation on Smithfield Foods Inc following an assessment of its second quarter fiscal 2013.
Why the Reiteration?
Smithfield reported its second quarter results on Dec 7, 2012. Its earnings exceeded the Zacks Consensus Estimate while sales missed the same. The company’s earnings lagged the prior-year earnings due to sluggish sales and weak margins in hog production business. Weak hog production margins overshadowed the improved margins of fresh pork, packaged meat and international segments. Also, lower meat and hog prices offset the tailwinds from higher overall volumes. The company’s operating margin declined during the quarter due to rising costs and lower sales.
Smithfield further expects its packaged meat margins to improve in third quarter fiscal 2013, the results of which are due on Mar 7, driven by favorable product mix and increased marketing of its core brands. In addition, the company expects hog prices to normalize in the coming quarter, thereby making the Hog Production segment profitable. Moreover, the company’s risk management strategy will help in limiting the impact of rising grain costs. In the International segment, both hog production and meat processing businesses are expected to improve in Poland and Romania. Further, the company continues to see strong export demand for fresh pork in fiscal 2013.
The company’s focus on brand building investments and innovation, restructuring initiatives, improved packaging and production of healthier products also adds to growth. Smithfield is also increasing its focus on consumer convenience by introducing more ready-to-eat foods. The restructuring of the pork segment is also expected to increase pork production and outweigh the rising prices of raw materials going ahead.
Smithfieldholds a Zacks Rank #2 (Buy). Other meat producers worth considering include Hillshire Brand Company , Tyson Foods Inc (TSN - Analyst Report) and Sanderson Farms (SAFM - Snapshot Report), each of them carrying a Zacks Rank #1 (Strong Buy).