Higher Feed Costs Weigh On Smithfield's Results: Implications On Restaurants

| About: Smithfield Foods (SFD)

Smithfield Foods (NYSE:SFD), the global pork processor and hog producer, reported earnings that fell significantly from a year ago despite higher revenues. The company earned $0.49 for its fiscal 2012 fourth quarter, down from $0.59 a year ago. Sales in its pork segment and in its hog segment actually increased compared to the same period a year ago, but higher feed costs across all segments pushed operating margins down to 5% from 9% a year ago. Pricing trends in the industry looks favorable, according to management, and we suspect the company will look to raise prices throughout its 2013 fiscal year.

Few restaurants in our coverage universe are affected by higher hog and pork prices; however, we think higher feed costs could lead to input cost increases for cattle and chicken end-users as well. Higher chicken feed prices harm not only Tyson (NYSE:TSN), but it could also negatively impact the results of YUM Brands (NYSE:YUM), McDonald's (NYSE:MCD), Buffalo Wild Wings (NASDAQ:BWLD) and Chipotle (NYSE:CMG). Higher cattle costs (beef) could also affect the profitability of McDonald's, Brinker (NYSE:EAT), Red Robin (NASDAQ:RRGB) and Texas Roadhouse (NASDAQ:TXRH). Even though all of these restaurants have been working through higher input costs for some time, it appears that food processors are becoming more focused on passing on these costs going forward.

Though operating results profits were significantly lower than a year ago, Smithfield repurchased 7% of its shares in fiscal year 2012, and the board authorized an additional $250 million for buying back stock. With shares trading around 8 times earnings and at a discount to book value, management believes buybacks are the best way for the company to return cash to shareholders. Though management may be right, we aren't huge fans of the volatility in the food processing business, which makes it difficult to assess the long-term intrinsic value of related companies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.