Smithfield Foods Inc is set to report its fiscal third quarter 2013 results on Mar 7. Last quarter it posted a positive surprise of 38.64%. Let’s see how things are shaping up for this announcement.
Growth Factors this Past Quarter
Smithfield’s focus on brand building investments and innovation, restructuring initiatives, improved packaged meat margins and strong export demand of fresh pork led to the second quarter earnings beat. However, the company’s earnings lagged the prior-year figure due to sluggish sales and weak margins in the hog production business. 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.
Our proven model does not conclusively show that Smithfield is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method)and a Zacks Rank #1, #2 or #3 for this to happen. That is not the case here as you will see below.
Negative Zacks ESP: That is because the Most Accurate Estimate stands at 50 cents, while the Zacks Consensus Estimate is higher at 53 cents, which results in an ESP of -5.66%.
Zacks Rank #2 (Buy): Smithfield currently carries a Zacks Rank #2 (Buy), which when combined with a negative ESP lowers the predictive power of ESP and makes surprise prediction difficult. We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement.
We believe that Smithfield’s continued focus on brand building investments and innovation, improving packaged meat margins, driven by favorable product mix and increased marketing of its core brands and production of healthier products is expected to benefit earnings in the upcoming quarter.
Smithfield is increasing its focus on consumer convenience by introducing more ready-to-eat foods. Moreover, its risk management strategy is expected to help in limiting the impact of rising grain costs. The restructuring of the pork segment is also expected to increase pork production and outweigh the rising prices of raw materials going ahead. In addition, the company expects hog prices to normalize in the coming quarter, thereby making the Hog Production segment profitable.
Other Stocks to Consider
Here are some other meat producing companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Tyson Foods Inc. (TSN - Analyst Report), Earnings ESP of +6.52% and Zacks Rank #1 (Strong Buy)
Pilgrim’s Pride Corp (PPC - Analyst Report), Earnings ESP of +88.89% and Zacks Rank #2 (Buy)
Sanderson Farms Inc (SAFM - Snapshot Report), Earnings ESP of +86.67% and Zacks Rank #3 (Hold)