We reaffirm our Neutral recommendation on
Smithfield Foods Inc
) following mixed fourth quarter results.
Why the Reiteration?
Smithfield reported its fourth quarter results on Jun 14,
2013. Its revenues increased 3.0% year over year, driven by the
strong momentum in the packaged meat business. Revenues also
exceeded the Zacks Consensus Estimate. However, earnings missed
the same and lagged the prior-year earnings figure due to weak
margins in the hog production business and decline in pork
The continued rise in grain costs after the 2012 draught
resulted in a sluggish hog production business. Pork exports also
declined due to a fall in shipments to China and Russia. The
requirement of a new ractopamine (animal drug) certification in
China slowed down the exports, which picked up later in
mid-March. Exports in Japan suffered due to depreciation of yen
The company's operating margin declined during the quarter due
to higher raising costs, which impacted both the hog production
business and the international segment.
Of late, Smithfield has struggled with rising grain costs and
a weak hog production business. Smithfield thus agreed to sell
itself to Hongkong-based meat processor Shuanghui in May-end.
Following the closure of the deal, Smithfield will not trade
publicly. Smithfield turned out to be an attractive prospect for
Shuanghui, given the former's solid management team and strong
product portfolio that strongly focuses on maintaining food
quality standards. The deal is likely to benefit Smithfield as it
can leverage Shuanghui's solid distribution network in China to
expand the presence of its brands. We believe that Smithfield and
Shuanghui together will be able to fulfill the growing appetite
of China for pork.
The deal is expected to be complete by the end of second
quarter of fiscal 2014 but is yet to receive shareholder and
regulatory approval. U.S regulators remain concerned about the
food supply chain as they do not find Shuanghui's food safety
practices in China acceptable.
Smithfield holds a Zacks Rank #3 (Hold). Other meat producers
Pilgrim's Pride Corp
Tyson Foods Inc
), both hold a Zacks Rank #1 (Strong Buy). Another food company,
Dole Food Company
) also holds a Zacks Rank #1.
DOLE FOOD CO (DOLE): Free Stock Analysis
PILGRIMS PRIDE (PPC): Free Stock Analysis
SMITHFIELD FOOD (SFD): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis
To read this article on Zacks.com click here.