Smithfield forecast earnings cut on bleak hog outlook

BB&T Capital Markets analyst Heather Jones cut fiscal 2010 and 2011 earnings forecasts for Smithfield Foods based on lower hog price assumptions due to weak demand and little evidence of meaningful industry sow slaughter.

In a note to investors, Jones widened the first quarter 2010 loss projection to 46 cents per share from 37 cents per share and put the full-year forecast at a loss of 98 cents per share compared to a loss of 34 cents per share earlier.

She reduced her 2011 earnings per share forecast to a profit of 94 cents per share from US$1 per share profit earlier.

She said projected losses, based upon lean hog futures and corn and soymeal futures, have soared and imply just four months of profitability through early calendar 2011.

She believes domestic demand, as well as exports, are flagging. While a steadily weakening dollar should help exports later this year, the uncertainty of a global economic recovery puts that in question.

Another negative factor for Smithfield is the slow sow slaughter response to the pork oversupply situation.

Jones predicted that if hog production profitability does not improve considerably from current levels, an equity raise is likely required to achieve the targeted debt or cap ratio.

If the company were to sell shares, she estimated it would need to sell about US$250 million worth, which would result in about 20 million extra shares, diluting fiscal 2010 earnings by about 5 cents per share.