Meat producer Smithfield Foods Inc posted earnings of 58 cents per share in the third quarter of fiscal 2013, ahead of the Zacks Consensus Estimate of 53 cents by 9.4%. However, results lagged the prior-year earnings (excluding early debt extinguishment charges) of 69 cents by 15.9% due to weak margins in hog production business and fresh pork category.
During the quarter, total sales increased 3.0% year over year to $3.58 billion, driven by strong momentum in packaged meat business, solid contribution from international operations and volume growth in all the categories. Total sales also beat the Zacks Consensus Estimate of $3.53 billion.
The company achieved volume growth in 9 of the 12 core brands, with double-digit growth in its Smithfield, Eckrich, Farmland and Margherita brands. Smithfield also gained market share in the bacon, dinner sausage, dry sausage and ham steak categories, and was able to expand the distribution of its core brands in a number of key product categories in the third quarter.
Operating profit declined 20.1% to $136.3 million during the quarter due to weak fresh pork results and higher raising costs. Operating margin declined 100 basis points to 4%. Weak hog production and fresh pork margins overshadowed the improved margin of packaged meat and international segments.
Pork: The Pork segment mainly consists of three wholly-owned U.S. fresh pork and packaged meat subsidiaries. Sales in the Pork segment increased marginally by 0.3% to $3.0 billion compared with the previous-year period.
Fresh Pork: Sales of fresh pork slipped 4.5% to $1.25 billion, while operating margin declined 200 basis points to 4%. An industry-wide cut down in pork supplies offset the decline in live hog prices, which resulted in weak fresh pork sales and thereby margins. However, retail sales volume of fresh pork increased double-digits and its export demand also increased across a number of markets from the year-ago period.
Packaged Meat: Sales of the packaged meat business increased 8.3% to $1.76 billion, while operating margin was flat at 7%.
Operating income improved 7% driven by solid volume growth across a number of key product categories, core brands and all trade channels. Increase in market share, improved product mix, higher strategic investment in advertising and lower raw material costs also contributed to the gain.
Hog Production: Hog Production sales increased 10.0% year over year to $837.9 million in the third quarter of fiscal 2013 as the company's risk management strategy mitigated losses in the quarter. However, the segment’s operating margins were disappointing at (8%) compared with a negative margin of 1% in the prior-year quarter due to higher raising costs.
International Segment: The segment reported a 9.1% increase in sales to $393.1 million in the reported quarter, despite higher raw material costs and macroeconomic headwinds. In addition, operating margins increased significantly to 11% compared with just 2% in the prior-year quarter led by strong results in the company's Eastern European hog production operations, and significant improvements in packaged meat businesses in Poland and Romania.
Other Financial Details
During the quarter, Smithfield repurchased 8.2 million shares worth $174 million.
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. For fiscal 2013, the company expects packaged meats margins at the high end of the normalized range with at least 2–3% volume growth. Smithfield expects this trend to continue in fiscal 2014.
Further, the company continues to focus on improving its product mix toward differentiated, branded and value-added products, both domestically and in the export markets. Smithfield also continues to see strong export demand for fresh pork in fiscal 2013.
The International segment is expected to continue delivering operating profits in fiscal 2013 and 2014 owing to positive fundamentals in Eastern Europe.
Smithfield expects weak business from the Hog Production segment but remains positive toward the company’s risk management strategy, which will help in limiting the impact of rising grain costs and thus make the segment profitable.
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.
Smithfield currently holds a Zacks Rank #2 (Buy). Some other meat producing companies include Hillshire Brands Company , Tyson Foods Inc. (TSN - Analyst Report) , and Pilgrim’s Pride Corp (PPC - Analyst Report) . Hillshire Brands holds a Zacks Rank #1 (Strong Buy), while Tyson and Pilgrim’s Pride carry a Zacks Rank #2 (Buy).