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We reaffirm our Neutral recommendation on Smithfield Foods Inc following an assessment of its third quarter fiscal 2013 results.

Why the Reiteration?

Smithfield reported its third quarter results on Mar 8, 2013 with both its earnings and sales exceeding the Zacks Consensus Estimate. The company’s earnings were however 15.9% lower than the prior-year quarter due to weak margins in hog production business and fresh pork category. Total sales increased 3.0% from the prior-year quarter, driven by strong momentum in the packaged meat business and solid contribution from international operations. Also, lower meat and hog prices offset the tailwinds from higher overall volumes. The company’s operating margin declined during the quarter due to weak fresh pork results and higher raising costs.

Smithfield continues to expect packaged meat margins to improve in the fourth quarter, driven by increased market share gains and marketing of its core brands. However, the company anticipates losses in the Hog Production segment, but the company’s risk management strategy is expected to help in limiting the impact of rising grain costs and normalize the losses. 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.

Other Stocks to Consider

Smithfield holds a Zacks Rank #3 (Hold). Other meat producers worth considering include Hillshire Brand Company , Hormel Foods Corp (HRL - Analyst Report) and Pilgrim’s Pride Corp (PPC - Snapshot Report) , each of them carrying a Zacks Rank #2 (Buy).

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