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Smithfield Beats EPS, Misses Sales

Zacks Equity Research

Smithfield Foods Inc. (SFD) delivered better-than-expected adjusted earnings of 69 cents per share in the third quarter of fiscal 2012, which surpassed the Zacks Consensus Estimate of 67 cents by 2 cents. However, the results lagged the prior-year quarter by 17.9%, owing to significantly higher raw material costs.

Quarterly Sales Details

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 higher pricing and strong sales growth in the packaged meats businesses. Total sales, however, lagged the Zacks Consensus Estimate of $3.53 billion.

Segment and Margin Details

Pork: On a reported basis, sales of the pork segment recorded a robust 11.5% growth from the previous year to $2.99 billion. The improvement was fuelled by a 19.2% growth in the fresh pork section and a 6.2% growth in packaged meats.

Operating profit in the pork segment decreased 23.1% to $195.9 million in the third quarter of 2012, owing to lower operating profits in the fresh pork and packaged meats section.

Operating margin in fresh pork decreased to 6% compared with 12% in the prior-year quarter, on higher raw material prices. However, operating margins in the fresh pork segment were above the normalized range at 6% and the results were bolstered by stable domestic supplies and solid exports. Operating margin in the packaged meat were also at the high end of the normalized range at 7%, experienced by an increase in product mix toward core brands with higher margins.

Hog Production and International: Hog Production posted a decent year-over-year revenue growth of 17.2% to $761.8 million. The segment’s operating margins were, however, below the normalized range at negative 1%, reflecting higher live hog market prices and pre-interest raising costs.

International segment: The segment also reported a sales growth of 1.3% to $360.4 million in the third quarter of 2012.

The segment’s operating profit declined to $6.2 million from $34.5 million. However, excluding the Campofrío charge, segment results boosted by robust earnings in live production, particularly in Eastern Europe.

Smithfield, together with its subsidiaries, engages in the production of hog, and processing of pork and beef worldwide. The company offers fresh pork products, packaged meat products, dry meat products and ready-to-eat foods.  Smithfield Foods is also involved in turkey production and hatchery operations.

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 U.S. protein supplies contract, supported by ongoing healthy export demand.

Smithfield, which competes with Hormel Foods (HRL) and Tyson Foods (TSN), holds a Zacks #3 Rank, implying a short-term Hold rating. Over the long-term, we maintain a Neutral recommendation on Smithfield.

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