Companies that operate in commodity markets often require a bit of reverse psychology when it comes to their stocks. Invest in protein producers like Tyson (NYSE:TSN) or Smithfield (NYSE:SFD) when times are great, and you are likely to be buying into a peak. With that in mind, the lackluster performance of Smithfield in its fiscal fourth quarter, combined with some iffy market fundamentals, might make this a stock worth watching.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Disappointing Results to Close the Year
Smithfield's stock has been sliding around roughly since the start of the year, as investors have been jittery about pork prices, inventories, export demand and rising costs. That came home to roost this quarter, as Smithfield posted a meaningful miss.

Revenue rose 3% and missed the average Wall Street analyst by a relatively trivial (2%) amount. While hog production benefited from some premiums to market prices and sales rose almost 8%, fresh pork sales rose 3% as a decline in cutout offset higher volume. Packaged meat sales were up less than 1%, but more or less as expected.

Margins were the problem area. Gross margin fell about four points, and adjusted operating profit (excluding some insurance benefits) dropped almost by half. Fresh pork margins plunged, hurt by higher supplies and weaker demand. Packaged meat margins are actually solid and the company increased its "normalized" guidance. International margins were also surprisingly weak, but management didn't offer a lot of information on this one.

SEE: Profitability Indicator Ratios: Profit Margin Analysis

Is Cold Storage Going to Chill the Market?
One of the reasons for concern on Smithfield is the potential for imbalance between production and demand. The USDA's most recent report shows more pork in cold storage (over 650 million pounds) than at any time in the past four years, and the trend is currently moving up. Whereas storage levels typically peak in the late winter and decline through the year, it doesn't seem to be moving that way this year.

With margins softening, the assumption is that producers are going to trim back on production. That should be supportive of prices, but further declines in corn (a key input in feed) would also help.

SEE: Investing Seasonally In The Corn Market

Where's the Balance in Domestic and Export Demand?
The demand situation for pork, like most food products, is still in flux. Shoppers in the U.S. have been trading down from beef to pork and from beef and pork to chicken - not such a threat for a diversified company like Tyson, but more problematic for Smithfield. At the same time, export markets continue to get more competitive. While Brazilian and Argentine producers are more interested in beef and chicken, there are plenty of contenders trying to capture share in markets like China.

This is where packaged and processed food can help smooth things out. Companies like Hormel (NYSE:HRL), Kraft (NYSE:KFT) and Sara Lee (NYSE:SLE) (soon to be Hillshire Brands) can reap some advantages from lower production costs, and don't seem to experience as much elasticity on the supermarket shelf. To that end, it's worth pointing out again that Smithfield's packaged business is showing pretty good margin strength.

SEE: Profit By Understanding Fundamental Trends

The Bottom Line
It's hard to recommend that investors step in front of a stock where the sentiment is so negative, but these shares are getting a little more interesting. While it no doubt seems too simplistic, the reality is that buying Smithfield shares at a price/book value of below 1.0 usually works out fairly well. This isn't a stock to be bought and held for the long term, but with the valuation below that critical point, it's at least worth a closer look.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    Factors Driving Kroger's Success

    Kroger’s focus on optimizing customer experience and cultivating its own product lines has proven to be successful strategy.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!