Smithfield Misses Estimates

Zacks

Smithfield Foods Inc. (SFD) posted adjusted earnings of 43 cents per share in the fourth quarter of fiscal 2012, which lagged the Zacks Consensus Estimate by 10 cents. The results also lagged the prior-year earnings of 85 cents per share, due to rising raw material costs and weak margins in fresh pork and hog production business.

During the quarter, total sales recorded a decent year-over-year increase of 9.0% to $3.48 billion from $3.19 billion in the prior-year quarter. The improvement was primarily attributed to strong sales growth in the packaged meats business. Total sales, however, lagged the Zacks Consensus Estimate of $3.53 billion.

Fiscal 2012 Results

The company delivered adjusted earnings of $2.59 per share (excluding one-time charges) in the fiscal 2012, which missed the Zacks Consensus Estimate of $2.66. The results also lagged the prior-year earnings of $3.03 per share (excluding one-time gains).

During the year, total sales recorded a decent year-over-year increase of 7.0% to $13.09 billion from $12.20 billion in the prior-year. The improvement was attributed to strong sales growth in the packaged meats business, continued investment in brands and focus on innovation and advertising. Total sales also exceeded the Zacks Consensus Estimate of $13.07 billion.

Segment and Margin Details

Pork: On a reported basis, sales of the pork segment recorded a 1.5% growth from the previous year to $2.73 billion. The improvement was fuelled by a 2.8% growth in the fresh pork category and a 0.5% growth in packaged meats.

Operating margin in the pork segment decreased to 4% in the fourth quarter of 2012 from 7% in the prior-year quarter. Though margins in the packaged meat category outperformed in the quarter despite higher raw material costs, steep decline in fresh pork margins led to the overall decline in the pork segment.

Fresh Pork: Operating margin in fresh pork declined significantly to 1% from 10% in the prior-year quarter, due to a 11% drop in the United States Department of Agriculture (‘USDA’) pork cutout. However, export demand continued to be strong, which resulted in a 13% increase in shipments.

Packaged Meat: Operating margin in this category, on the other hand, increased to 7% from 5% in the prior-year quarter, primarily attributable to strong sales, focus on innovation and advertising and lower raw material costs.

Hog Production: Hog Production posted a decent year-over-year revenue growth of 7.9% to $755.7 million. The segment’s operating margins also declined steeply to 5% in the quarter from 12% in the prior-year quarter.

International segment:The segment also reported a marginal sales growth of 0.3% to $340.2 million in the fourth quarter of 2012. The segment’s operating margin improved to 6% as compared to 4% in the prior-year quarter, led by impressive performance in the company's hog production operations.

Other Financial Details

Interest expense decreased 17% in the fourth quarter and 28% in fiscal 2012, reflecting the company’s successful efforts in reducing leverage and interest expense. The company expects interest expense to total $170 million for fiscal 2013.

During the quarter, Smithfield repurchased $79 million of shares, and $189 million shares at the year-end. The company’s Board has authorized a new $250 million share buyback program. The company also repaid $138 million of bonds in fiscal 2012.

Management has undertaken restructuring initiatives in an effort to save costs and boost profitability, which augur well for future operating performance. In addition, the company expects fresh pork to continue to benefit the company with its ongoing healthy export demand.

Smithfield, which competes with Hormel Foods (HRL) and Tyson Foods (TSN), holds a Zacks #5 Rank (short-term ‘Strong Sell’ rating).

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