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Smithfield Living High Off The Hog
On March 10, Smithfield Foods (NYSE:SFD) posted record third-quarter earnings driven by favorable conditions in the pork industry.With the combination of lower hog supplies, higher live hog prices and favorable grain hedges, Smithfield was able to capitalize on the strong global demand for pork, which led to its robust results. Let's take a closer look at Smithfield's performance over the third quarter, and what investors should expect from the company going forward.
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Pork Segment
Pork operating profit for the quarter was $254.8 million, an increase of $102 million from the previous year's quarter. Packaged meats operating profit fell, however, from $141.6 million to $124.5 million, although sales of packaged meats grew by 17%. Operating margin for the pork segment was 12%, despite a 12% increase in live hog market prices. Although he gave a positive outlook for his company, Smithfield CEO Larry Pope also said, "I would not be at all surprised if there was a minor drop in volume as consumers react to something cheaper. They could rotate to chicken."
Meat Producers
Meat producers' results have been mixed recently, due to the combination of complex and sometimes conflicting industry factors. Meat producer Tyson Foods (NYSE:TSN) forecast better-than-expected 2011 earnings, largely due to a surge in its pork business. While Tyson's beef division has done well, its noted chicken business was off, as were results for chicken producer Sanderson Farms (Nasdaq:SAFM). Sanderson struggled with feed cost increases and too much product.
The global picture for pork remains strong. China meat producer Zhongpin (Nasdaq:HOGS), with its large pork business, had robust earnings and sales growth, with expansion of markets and higher sales volume. Another China hog producer, Tianli Agritech (Nasdaq:OINK), announced a strong profit outlook for 2011 due to China's continued economic growth. Despite the difficulty with potentially rising prices and the still-recovering U.S. consumer, Smithfield's CEO Larry Pope remained bullish on his company's prospects for this year and beyond. Although grain prices are higher, global demand weighed against tighter inventories are reasons why Pope thinks the pork industry will continue to thrive.
Smithfield's Sales and Earnings Rise
For its third quarter, Smithfield's total revenue was $3.19 billion, compared to $2.88 billion in the same quarter last year. Net income was $202.6 million, or 84 cents per adjusted non-GAAP share, compared to $37.3 million, or 22 cents per diluted share. GAAP diluted EPS included extraordinary gains, which raised EPS to $1.21.
It would oversimplify matters to say that Smithfield's results are all due to a sweet spot in pork in terms of the global commodity picture for the pork industry. Feed grain prices are higher, yet the company managed its production, marketing and cost structure well. It has also paid down debt, reducing it by $913 million to $2.1 billion.
Smithfield's Prospects
One key for a company like Smithfield in such a commodity-driven industry is to make the most of an up cycle. Smithfield is doing this. It's also used the better business times to tighten its operations and improve its balance sheet. Smithfield's able management should help it better weather the inevitable downturn in its industry. (For related reading, take a look at 5 Economic Changes That Fatten Your Grocery Bill.)
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IN PICTURES: 5 Investing Statements That Make You Sound Stupid
Pork Segment
Pork operating profit for the quarter was $254.8 million, an increase of $102 million from the previous year's quarter. Packaged meats operating profit fell, however, from $141.6 million to $124.5 million, although sales of packaged meats grew by 17%. Operating margin for the pork segment was 12%, despite a 12% increase in live hog market prices. Although he gave a positive outlook for his company, Smithfield CEO Larry Pope also said, "I would not be at all surprised if there was a minor drop in volume as consumers react to something cheaper. They could rotate to chicken."
Meat Producers
Meat producers' results have been mixed recently, due to the combination of complex and sometimes conflicting industry factors. Meat producer Tyson Foods (NYSE:TSN) forecast better-than-expected 2011 earnings, largely due to a surge in its pork business. While Tyson's beef division has done well, its noted chicken business was off, as were results for chicken producer Sanderson Farms (Nasdaq:SAFM). Sanderson struggled with feed cost increases and too much product.
The global picture for pork remains strong. China meat producer Zhongpin (Nasdaq:HOGS), with its large pork business, had robust earnings and sales growth, with expansion of markets and higher sales volume. Another China hog producer, Tianli Agritech (Nasdaq:OINK), announced a strong profit outlook for 2011 due to China's continued economic growth. Despite the difficulty with potentially rising prices and the still-recovering U.S. consumer, Smithfield's CEO Larry Pope remained bullish on his company's prospects for this year and beyond. Although grain prices are higher, global demand weighed against tighter inventories are reasons why Pope thinks the pork industry will continue to thrive.
For its third quarter, Smithfield's total revenue was $3.19 billion, compared to $2.88 billion in the same quarter last year. Net income was $202.6 million, or 84 cents per adjusted non-GAAP share, compared to $37.3 million, or 22 cents per diluted share. GAAP diluted EPS included extraordinary gains, which raised EPS to $1.21.
It would oversimplify matters to say that Smithfield's results are all due to a sweet spot in pork in terms of the global commodity picture for the pork industry. Feed grain prices are higher, yet the company managed its production, marketing and cost structure well. It has also paid down debt, reducing it by $913 million to $2.1 billion.
Smithfield's Prospects
One key for a company like Smithfield in such a commodity-driven industry is to make the most of an up cycle. Smithfield is doing this. It's also used the better business times to tighten its operations and improve its balance sheet. Smithfield's able management should help it better weather the inevitable downturn in its industry. (For related reading, take a look at 5 Economic Changes That Fatten Your Grocery Bill.)
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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