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
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.
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
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.
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 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.
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
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.
Pilgrim's Pride Corp
). Hillshire Brands holds a Zacks Rank #1 (Strong Buy), while
Tyson and Pilgrim's Pride carry a Zacks Rank #2 (Buy).
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