Smithfield Foods Earnings Preview

| About: Smithfield Foods (SFD)

Smithfield Foods, Inc. (NYSE:SFD) is scheduled to announce its third quarter 2012 results on March 8, 2012, and we see a positive trend in the analysts’ estimates at this point. Currently, the Zacks Consensus Estimate is 67 cents per share and sales estimate is around $3.53 billion.

Second Quarter Overview

Smithfield swung to second-quarter 2012 earnings record of 76 cents per share - on December 09, 2011, which surpassed the Zacks Consensus Estimate of 69 cents by 10.1%. Strong fresh pork earnings and double-digit exports despite higher raw material costs can be ascribed to the positive results.

Sales increased 10.0% to $3.3 billion in the second-quarter, exceeding the Zacks Consensus Estimate of $3.2 billion, primarily attributed to higher average unit selling prices in the Pork segment.

During the quarter, the company repurchased $111 million of stock, while redeemed $115 million of long-term bonds year to date.

Agreement with Analysts

The analysts expect the company to follow the trend of beating its earnings estimates, as it has been doing since the last four quarters. The analysts expect the company to maintain hog production business and experience strong momentum in its Pork segment supported by solid brands and positive industry fundamentals.

Moreover, Smithfield targets 3% sales volume growth in the packaged meats business in fiscal 2012. With a slight upside in the current quarter and fiscal year, the estimate revision trends justify a positive sentiment on the stock.

Out of the 14 analysts providing estimates for the current quarter, only 1 of them has revised his estimate upwards over the past 30 days, whereas none of the analysts downgraded the stock. For fiscal year 2012, 1 out of the 13 analysts raised his estimate over the last 30-day period, while only 1 downgraded his estimate. 2 out of the 13 analysts increased their estimates over the past 30 days for fiscal 2013, while none have provided estimates in the downward direction.

For 2013, the company is very hopeful as it is planning to achieve profitable top-line growth in its consumer packaged meats business, which will be fueled by increased consumer marketing of the company’s key brands.

Further, management has undertaken restructuring initiatives in an effort to save costs and boost profitability, which augur well for future operating performance. The company’s vertical integration and product mix will also help to increase margins.

Magnitude of Estimate Revisions

Over the past 30 days, Smithfield has increased its estimate by a penny to 67 cents for the current quarter, to $2.71 per share for the current fiscal year of 2012 and to $2.81 per share for the next fiscal year 2013.

Smithfield, together with its subsidiaries engages in the production of hog, and processing of pork and beef worldwide. The company offers fresh pork products, packaged meats products, dry meat products and ready-to-eat foods. Smithfield Foods is also involved in turkey production and hatchery operations.

However, intense competition from other established players and cyclical nature of the company’s operations undermine the company’s future growth prospects and profitability. The main competitors are Hormel Foods (NYSE:HRL) and Tyson Foods (NYSE:TSN). We thus maintain the long-term recommendation on Smithfield as Neutral, while the company has a Zacks #3 Rank, implying a short-term Hold rating.

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