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Smithfield to Miss in Q4: Preview

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We expect meat producer Smithfield Foods Inc to miss expectations when it reports second quarter 2013 results on December 5.

While Smithfield Foods has generated positive surprises in the past, it has not done very well this year, missing the Zacks Consensus Estimate by 18.9% and 11.1% in the April and July quarters, respectively. This in turn pulled down the average surprise percentage to -4.2% in the trailing four quarters.

Smithfield Foods is one of the worst affected by the poor corn crop this year, which increased feed costs in the last-reported quarter, in turn increasing the cost of hog production. Ample hog supply also impacted hog pricing, thus cutting margins on both counts.

Pork segment restructuring initiatives are a positive, and higher slaughtering could stem margin contraction here. But the effect is unlikely to be long-lived, as weak demand will soon lead to packaged inventory build-up, which will again impact prices, and therefore, margins. 

In the last 60 days, there were a couple of downward revisions in estimates for the October quarter, which had the Zacks Consensus Estimate moving down 2 cents (4.5%) to 44 cents. Estimates for fiscal years 2013 and 2014 have moved up however, from $1.82 to $1.84 (1.1%) and from $2.19 to $2.26 (3.2%), respectively.

The Zacks ESP (Expected Surprise Prediction) is -13.64% for the October quarter, indicating that the company is likely to miss estimates this quarter.

Performance across the sector has been mixed so far, with Zhongpin Inc missing the Zacks Consensus by 23.1%, Tyson Foods (TSN - Free Report) ), beating the Zacks Consensus by 27.9% and Hormel Foods (HRL - Free Report) reporting in line. Sanderson Farms (SAFM - Free Report) is yet to report and given its Zacks ESP of 41.38%, it is unlikely to disappoint.

SmithField, Hormel and Sanderson currently have a Zacks Rank #3 (Hold), compared with Zhongpin, which has a Zacks Rank #5 (Strong Sell) and Tyson Foods, which has a Zacks Rank #2 (Buy).

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