Smithfield Foods Inc
) posted earnings of 27 cents per share in the first quarter of
fiscal 2014, missing the Zacks Consensus Estimate of 38 cents by
28.9%. The results also lagged the prior-year earnings of 40
cents by 32.5% due to a weak operating environment in fresh pork
and the international business.
The company's earnings from fresh pork suffered on account of
seasonal weakness. Higher raising costs in the hog production
businesses in Eastern Europe and Mexico dented the profits of the
international segment. Pork exports also continued to decline in
the first quarter due to lower shipments to key export markets,
namely Japan, China and Russia.
During the quarter, total sales increased 10.0% year over year
to $3.4 billion, driven by strong momentum in the packaged meat
business. The company also witnessed improved volumes as well as
increased market share across its product portfolio and in its
core brands like Smithfield, Armour, Kretschmar, Curly's,
Margherita and Carando in the first quarter. Total sales also
beat the Zacks Consensus Estimate of $3.2 billion.
Operating profit declined 26.2% to $97.3 million during the
quarter due to weak margins at the pork and international
segments. Operating margin declined 100 basis points to 3%. Weak
pork and international segment margins overshadowed the strong
margin of the hog production segment.
The Pork segment mainly consists of three wholly-owned U.S. fresh
pork and packaged meat subsidiaries. Sales in the Pork segment
increased 9.6% to $2.85 billion compared with the previous-year
: Sales of fresh pork increased 8.1% to $1.36 billion. However,
operating margin declinedto negative 3% compared with a negative
1% in the prior-year quarter as the company was not able to pass
on the higher hog costs to its customers. Exports were also
sluggish due to seasonal weakness in the first quarter.
Sales of the packaged meat business increased 11.1% to $1.49
billion. Segment sales were driven by solid volume growth across
a number of key product categories and core brands. The segment
also witnessed improved market share in cooked dinner sausage,
dry sausage and marinated pork. The company also expanded
distribution in its Eckrich cooked dinner sausage, Gwaltney hot
dogs, Smithfield bacon, Curly's BBQ, Armour dry sausage, Armour
portable lunches and Smithfield and Farmland marinated pork.
Segment's operating margin declined 300 basis points on a
year-over-year basis to 7% due to higher raw material costs.
Hog Production sales increased 19.7% year over year to $872.4
million in the first quarter of fiscal 2014 due to higher hog
prices. The company's risk management strategy also helped
mitigate losses in the quarter. The segment's operating margins
were also strong and increased to 8% compared to a margin of 3%
in the prior-year quarter. Higher hog prices were able to more
than offset the higher raising costs in the quarter.
The segment reported an 8.4% increase in sales to $376.0 million
in the reported quarter, despite higher raw material costs and
macro-economic headwinds. However, segment operating margin
declined 400 basis points to 1% in the quarter due to higher feed
costs in the company's hog production operations.
Smithfield-Shuanghui Merger Update
On Sep 6, the Committee on Foreign Investment in the United
States (CFIUS) approved the proposed merger deal of Smithfield
with Hongkong-based Shuanghui International Holdings Limited.
Smithfield and Shuanghui also announced that the parties have
received governmental merger clearance in Ukraine.
The CFIUS is in charge of reviewing foreign acquisitions made
by U.S. companies for potential national security concerns. The
30-day review period starts from the time a potential acquisition
is reported. Following the end of the 30-day period, CFIUS can
exercise its option to extend the term to a maximum of another 45
Per the deal signed on May 30, Shuanghui will acquire all of
the outstanding shares of Smithfield for $34.00 per share,
totaling $7.1 billion, including Smithfield's debt. The deal will
open the doors for Smithfield to expand its footprint in China
taking advantage of Shuanghui's solid distribution network.
As far as Shuanghui is concerned, it will be able to meet the
growing demand for pork in its domestic market by gaining control
of Smithfield's brands such as Smithfield, Armour and
Shuanghui has arranged for the finances for the merger and the
deal is still expected to close in the second half of 2013.
However, the transaction is yet to receive shareholder
Smithfield's shareholders are scheduled to vote on the
transaction at a special shareholders meeting to be held on Sep
24, 2013. However, one of the largest shareholders of Smithfield,
Starboard Value LP, with beneficial ownership of approximately
5.7%, is planning to vote against the deal as it is seeking other
offers that would provide greater value to Smithfield's
Starboard has sent a letter to Smithfield's board stating that
it has received written interest from other parties to buy
Smithfield's assets at a higher value. Starboard had also sent a
letter to Smithfield's board of directors in June stating that it
will be in the best interest of the shareholders if Smithfield
sells off its various divisions like pork, hog production and
international business individually rather than divesting the
whole business all at once. Starboard also stated that the
estimated value of the company is $9 billion - $10.8 billion or
$44 - $55 per share, which is much higher than the deal price of
$34 per share.
Smithfield holds a Zacks Rank #2 (Buy). Meat producers like
Pilgrim's Pride Corp
) with a Zacks Rank #1 (Strong Buy) and
Tyson Food Inc
) with a Zacks Rank #2 (Buy) are better placed and are worth
considering. Another food company
Dole Food Co Inc
) with a Zacks Rank #2 can also be considered.
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
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