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The entire protein segment is getting crushed in sympathy with Pilgrim's Pride's (NASDAQ:PPC) liquidity woes. Last Friday, Smithfield Foods (NYSE:SFD) was subject to persistent rumors that it too, was close to suffering a similar fate.

 

Its share price went on a  roller coaster ride of epic proportions. The shares were extremely volatile diving as much as 18% before rebounding to only a 2% snip on nearly two and one half times average daily volume.

 

Share recovery after company statement: SFD issued a press release near the end of Friday's session to calm investors, and it was effective. The largest pork producer in the world made three key points: (1) Their liquidity position is solid, as they have access to $500 million of untapped credit lines (2) They are in compliance with all loan covenants, and expect to remain in compliance through fiscal year ending 4/26/09 (3) The company has been historically active in the commodities markets as a management technique and expects its current hedging positions to be favorable to the current quarter.

 

Buying opportunity: When the shares were at these same levels last July, they rapidly appreciated almost 50% in a span of only five weeks.  Although the shares dropped an additional 17% from last July's lows (but have since recovered), it appears that Friday's trading represented a potential capitulation event,  perhaps clearing out the remainder of  weak hands, thus reducing the potential overhead supply of shares. The probability of another rally is good, as the company is healthier at this juncture,  since overall industry conditions have  improved:  (1) Both fuel and grain prices have fallen 30% from their highs (2) Capacity cuts in the sector will provide producers more pricing power as supply is tightened (3) Cost cutting programs are starting to gain traction.

 

Analyst expectations: SFD is expected to report a second quarter loss of .05 on sales of $3.21 billion, with current fiscal year earnings forecast at 56 cents. The pundits are much more optimistic about SFD's  prospects in 2010, as their estimates almost triple, to $1.69 per share. This equates to a  forward multiple of only ten times estimates. The shares are selling at almost 50% discount to their mean one year analyst price target of $30, creating an opportunity for a 75% return on investment, if the target price is met.

 

Insider activity:  Management has a significant stake in the company, providing them ample incentive  to protect their investment while being keenly aware of the share price. Paul Fribourg owns 10.4 million shares, Joe Luter controls 3.6 million shares and  Wendell Murphy retains 1.3 million shares.  Fribourg has been taking advantage of the recent slide in the share price by purchasing 63000 additional shares during the past three months, however, Luter has been actively selling. Each of these insiders are  current board members.

 

Major Holders:  Tradewinds Global Investors is the largest shareowner with a 9.5% stake, followed by Lord Abbett, Lazard Asset Management and COFCO China, all carrying 5% ownership positions. COFCO's Chairman, Gaoning Ning, was  recently elected to the Board of SFD and pledged a partnership that will allow SFD to capitalize on the reality that China's pork consumption is greater  than all the other countries combined. 

 

Bottom line: The stock's recent slide provides another formidable buying opportunity for those who missed the boat the last time around. The economy is certainly weak, input costs are out of control and pricing is soft, (why else would the shares be at eight year lows?) but the current cycle is destined to improve, and in the meantime, we all must continue to eat. The shares present downside risk of about $4, but upside potential nearing $12, providing a juicy 3.0 risk reward ratio.

 

Disclosure: Long

Source: Smithfield Foods: Recent Slide Offers Meaty Buying Opportunity