We reaffirm our Neutral recommendation on
Smithfield Foods Inc
) following an assessment of its second quarter fiscal 2013.
Why the Reiteration?
Smithfield reported its second quarter results on Dec 7, 2012.
Its earnings exceeded the Zacks Consensus Estimate while sales
missed the same. The company's earnings lagged the prior-year
earnings due to sluggish sales and weak margins in hog production
business. Weak hog production margins overshadowed the improved
margins of fresh pork, packaged meat and international segments.
Also, lower meat and hog prices offset the tailwinds from higher
overall volumes. The company's operating margin declined during
the quarter due to rising costs and lower sales.
Smithfield further expects its packaged meat margins to
improve in third quarter fiscal 2013, the results of which are
due on Mar 7, driven by favorable product mix and increased
marketing of its core brands. In addition, the company expects
hog prices to normalize in the coming quarter, thereby making the
Hog Production segment profitable. Moreover, the company's risk
management strategy will help in limiting the impact of rising
grain costs. In the International segment, both hog production
and meat processing businesses are expected to improve in Poland
and Romania. Further, the company continues to see strong export
demand for fresh pork in fiscal 2013.
The company's focus on brand building investments and
innovation, restructuring initiatives, improved packaging and
production of healthier products also adds to growth. Smithfield
is also increasing its focus on consumer convenience by
introducing more ready-to-eat foods. The restructuring of
the pork segment is also expected to increase pork production and
outweigh the rising prices of raw materials going ahead.
Smithfieldholds a Zacks Rank #2 (Buy). Other meat producers
worth considering include
Hillshire Brand Company
Tyson Foods Inc
), each of them carrying a Zacks Rank #1 (Strong Buy).
HILLSHIRE BRAND (HSH): Free Stock Analysis
SANDERSON FARMS (SAFM): Free Stock Analysis
SMITHFIELD FOOD (SFD): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis
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