Smithfield to benefit from more profitable hog production

Predicting improvement in the profitability of hog production in the next year, analysts raised ratings on Smithfield Foods to overweight from equal-weight and upped its share price target to US$20 from US$16.

Stephens Inc. analyst Farha Aslam says hog producers have been in the red since the summer of 2007, and believes that a turnaround, albeit a slow one, will become more evident in the coming year.

According to Aslam, that optimism comes from increased confidence that the AH1N1 virus will not significantly affect domestic pork demand or access to international markets; optimism about pork exports and production reductions; and greater assurance of the US grain harvest.

With Smithfield due to report its fiscal second-quarter 2010 earnings on December 10, Stephens Inc. estimates that Smithfield's normalised mid-cycle earnings are about US$2 per share and expects the company to report a loss of 33 cents per share compared with a loss of 21 cents per share in the year-ago period. The Wall Street consensus for Smithfield's second quarter is a loss of 37 cents per share.

Morgan Stanley, meanwhile, reportedly raised its quarterly earnings-per-share target for Smithfield to a loss of 49 cents from a loss of 65 cents predicted earlier, but the firm maintained its equal-weight rating on the stock.

The firm cited a recent improvement in lean hog prices and packer margins, and predicts that pork demand will support increased prices despite rising wholesale costs.