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Smithfield Hedges Hog Potential Profits
Smithfield Foods (NYSE:SFD), the nation's largest hog producer and pork processor, reported a narrower loss for its fourth quarter in fiscal 2010. The company was hit with losses from its complex hedging practices for hog futures.
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Hogging The Profits
Smithfield lost $58 million on hog futures in its commodities trading activities during the quarter. Without this loss, earnings would have been a positive 18 cents per share. Instead, with the futures losses, net income was a loss of $4.6 million, or a loss of 3 cents a share, compared to a loss of $81 million or a loss of 57 cents a share in last year's same quarter. It's difficult to gauge the effects of Smithfield's hedging practices, so the company has agreed to cut back on them. Smithfield's revenue for the quarter increased slightly to $2.9 billion from $2.85 billion.
Industry Looking Up
Smithfield's fiscal 2010 results showed revenue of $11.2 billion, down from $12.49 billion, with a net loss of $101.4 million, less than the $198.4 million loss the previous year. The EPS was a loss of 65 cents versus a loss of $1.41 in fiscal 2009. Chief executive C. Larry Pope said during a conference call, "the last two years were the most challenging in the last 30 years." The global recession, the H1N1 virus fears, lower hog prices as well as spiking grain prices and the overextended supply of hogs all factored into the deep business downturn.
Tighter supplies with better hog prices, already up 23%, are expected to continue this year. Lower feed prices should also continue to help the business. The international markets, which contributed to the small fourth-quarter gains, should be another positive factor going forward.
Other Factors
The food processing business contains a number of cautions concerning its hoped for rebound this year, in Smithfield's case, its fiscal 2011. First is the uncertainty of hog futures prices. Some observers feel these might have peaked. Smithfield's competitors may feel uncertainty not just in the pork trade. There is uncertainty in the processing industry with chicken prices, also. Tyson Foods (NYSE:TSN) and Pilgrim's Pride (NYSE:PPC), the two large chicken producers, can be more affected by this. (For more, see 22 Ways To Fight Rising Food Prices.)
New Industry Rules Proposed
The new USDA antitrust rules proposed for the meat industry, which may shift the balance of power away from the processors toward the farmers and ranchers, can have a yet as unknown effect on the industry. This bargaining power smaller producers may gain won't be limited to cattle or other livestock, as chicken processors' control over the chicken farmers who supply them may be curbed. Again, these new rules are proposed, so it is premature to assess how this may impact revenue and profits in the industry, but it's a development that should be watched.
The Year Ahead
On the more visible horizon, there are more usual factors that may play into the competitive equation in the meat processing industry. For Smithfield, the international market is appealing but not empty of other players. China's Zhongpin (Nasdaq:HOGS) is a tremendous growing company which feeds the Chinese pork market. It posted a 37% net income increase this quarter from last year's, as well as a 33% revenue increase. On the domestic side, companies such as Hormel (NYSE:HRL) struggled recently with the high pork prices, while Tyson did well despite higher meat or protein prices. So the execution can vary greatly even given the roughly same industry picture for competitors. Smithfield needs to deliver a big year in this year.
Smithfield's Prognosis
Things are looking up in the meat processing industry due to a better economy, but neither Smithfield nor the others have a lock on having a great year. Investors should wait things out to see more revenue and earnings consistency, a stability that would better lend itself to buying the stock.
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IN PICTURES: 8 Ways To Survive A Market Downturn
Hogging The Profits
Smithfield lost $58 million on hog futures in its commodities trading activities during the quarter. Without this loss, earnings would have been a positive 18 cents per share. Instead, with the futures losses, net income was a loss of $4.6 million, or a loss of 3 cents a share, compared to a loss of $81 million or a loss of 57 cents a share in last year's same quarter. It's difficult to gauge the effects of Smithfield's hedging practices, so the company has agreed to cut back on them. Smithfield's revenue for the quarter increased slightly to $2.9 billion from $2.85 billion.
Industry Looking Up
Smithfield's fiscal 2010 results showed revenue of $11.2 billion, down from $12.49 billion, with a net loss of $101.4 million, less than the $198.4 million loss the previous year. The EPS was a loss of 65 cents versus a loss of $1.41 in fiscal 2009. Chief executive C. Larry Pope said during a conference call, "the last two years were the most challenging in the last 30 years." The global recession, the H1N1 virus fears, lower hog prices as well as spiking grain prices and the overextended supply of hogs all factored into the deep business downturn.
Tighter supplies with better hog prices, already up 23%, are expected to continue this year. Lower feed prices should also continue to help the business. The international markets, which contributed to the small fourth-quarter gains, should be another positive factor going forward.
The food processing business contains a number of cautions concerning its hoped for rebound this year, in Smithfield's case, its fiscal 2011. First is the uncertainty of hog futures prices. Some observers feel these might have peaked. Smithfield's competitors may feel uncertainty not just in the pork trade. There is uncertainty in the processing industry with chicken prices, also. Tyson Foods (NYSE:TSN) and Pilgrim's Pride (NYSE:PPC), the two large chicken producers, can be more affected by this. (For more, see 22 Ways To Fight Rising Food Prices.)
New Industry Rules Proposed
The new USDA antitrust rules proposed for the meat industry, which may shift the balance of power away from the processors toward the farmers and ranchers, can have a yet as unknown effect on the industry. This bargaining power smaller producers may gain won't be limited to cattle or other livestock, as chicken processors' control over the chicken farmers who supply them may be curbed. Again, these new rules are proposed, so it is premature to assess how this may impact revenue and profits in the industry, but it's a development that should be watched.
The Year Ahead
On the more visible horizon, there are more usual factors that may play into the competitive equation in the meat processing industry. For Smithfield, the international market is appealing but not empty of other players. China's Zhongpin (Nasdaq:HOGS) is a tremendous growing company which feeds the Chinese pork market. It posted a 37% net income increase this quarter from last year's, as well as a 33% revenue increase. On the domestic side, companies such as Hormel (NYSE:HRL) struggled recently with the high pork prices, while Tyson did well despite higher meat or protein prices. So the execution can vary greatly even given the roughly same industry picture for competitors. Smithfield needs to deliver a big year in this year.
Smithfield's Prognosis
Things are looking up in the meat processing industry due to a better economy, but neither Smithfield nor the others have a lock on having a great year. Investors should wait things out to see more revenue and earnings consistency, a stability that would better lend itself to buying the stock.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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