Smithfield Foods: Half-Off Sale Presents Buy Opportunity

| About: Smithfield Foods (SFD)

Smithfield Foods (NYSE:SFD) has seen its shares trimmed nearly 50% in just the past four weeks. The main culprit: soaring feed corn costs trimmed Q4 earnings by 94%. A series of events then unfolded to systematically destroy the share price:

(1) S&P downgraded SFD's debt ratings
(2) D.A. Davidson cut its opinion from neutral to under-perform
(3) COFCO, China's largest pork producer announced its intention to purchase a 5% stake
(4) SFD announced a plan to raise $350 million through the sale of senior notes.

Wall Street took SFD behind the woodshed and gave it a beating that was not warranted. As a result, the shares simply dropped too much in too short a period of time on news that was really not that bad. First, the company is taking the proper action to ward off any potential liquidity issues by raising capital through the sale of shares and notes that should fetch about $450 million. SFD recently sold their Beef operations to a Brazilian company for $565 million cash and the transaction is near closing. Consequently SFD should see a total of $1 billion in cash infusions within the next six months. Second, it's good that they are becoming affiliated with the largest pork producer in China as this combination will present numerous opportunities to grow sales. Third, I would not put too much credence in analyst recommendations as most of the time, their advice is mediocre at best.

The shares are dirt cheap with a market cap of just $2.3 billion and a forward multiple of only 14 times 2009 estimates. The stock sells at a 20% discount to book value of $22. The company has annual sales of $11 billion and a price to sales ratio of a mere .20.

Smithfield has multiple key brands such as Butterball, Eckrich, John Morrell and Armour. It's rich in real estate with over 50 meat processing locations throughout the US and the World.

Some analysts are still upbeat, as BB&T recently upgraded their opinion last April with a buy rating and a $28 target while Farha Aslam of Stephen's Inc. reiterated a buy rating just today.

The High price of corn will soon fade. The floods probably won't be back for a long time. It's all cyclical and with prices so high, many farmers will increase their acreage devoted to corn to capitalize. The problem is once more supply is created, the price falls. A very good thing for SFD.

The company is currently in damage control mode. They are in the process of cutting costs and selling non-core assets. They are reducing their hog herds and taking the necessary steps appropriate to take advantage of the next up cycle in their industry. SFD also has a 20 million share repurchase plan in effect with 3 million shares still available for purchase.

When the dust settles and calmer minds prevail, SFD shares should see a powerful rally as bargain hunters and short covering (buying to book profits) provides the upside fuel. The bottom line: Wall Street once again overreacted, providing those investors with a contrarian mentality the chance to profit handsomely by purchasing a quality company at half-off.

Disclosure: Long