Smithfield Foods: Too Many Piggies Going to Market

Smithfield Foods (SFD) went whole hog buying up meat assets over the past several years. Heralded at the time, these acquisitions have not been the home run many analysts thought. Then again, who could have foreseen grain prices, fuel prices and myriad other issues several years ago having such an impact on the meat industry - especially pork.

The USDA released data last week indicating that the US hog count is up 7% from a year ago, well above consensus expectations of 4.6%. This is why cash prices for hogs, the crown jewel of Smithfield Foods, remain very, very low. The combination of low hog prices and high feed and fuel costs are very negative for SFD.

To make matters worse, sows fertilized from December-February were up 5% from March of 2007, again well above consensus.

SFD has announced a 5% reduction in its sow herd, but the bad news is that it will take at least one year for these reductions to improve hog prices.

Analysts are divided on this stock. I view the problems with Smithfield Foods serious enough to caution investors away from this issue, for at least the next nine to twelve months. I don't think you will be late to any revival of Smithfield Foods' stock price in the meantime.

SFD is a hog producer and pork and beef processor. The pork segment produces a variety of fresh and smoked pork and packaged meat products in the United States and markets them nationwide and to a number of foreign countries. SFD operates over forty pork processing plants. Beef is a smaller component of the meat business for Smithfield Foods. Beef operations are centered in the US, including a cattle feeding operation. Hog production facilities encompass approximately 900,000 sows producing about 13.9 million hogs annually. SFD takes pride in using all parts of the hog. Everything but the squeal,it appears. Much of what is left after processing and rendering is turned into biofuels.

Trading at $25.96 per share with a 52-week low of $23.75 and high of $35.79, SFD maintains a hefty average daily share volume of 1,275,000 shares. There is no dividend and the P.E. is 18.7. Some reported mutual fund positions include Fidelity Low Priced Stock Fund, Lord Abbett Mid-Cap Value Fund, Vanguard Windsor II Fund and the Pacific Select Mid-Cap Value Portfolio. Tradewinds Global Investors LLC, Lazard Asset Management LLC and the ContiGroup Companies all own a sizable chunk of shares.

I held SFD in my Speculative Portfolio a while back, selling when fuel prices and the ethanol/grain price fiasco began to take hold. I do like the management of SFD. And I believe that this company will be a good purchase - many months from now.

Full Disclosure: The author does not hold shares of SFD.