August 24, 2011


Pork rally to boost Smithfield's 2012 profit

As the pork market picks up, equity analyst firm BB&T Capital Markets raised its fiscal 2012 Q1 and Q2 earnings forecast for Smithfield Foods to US$0.67/share and US$0.71/share, respectively, from earlier projections of US$0.63 and US$0.48.


For the full year, BB&T raised its estimate to US$2.25 from US$1.86.


BB&T said momentum in fresh pork margins, especially in July, on strong cut-out values and hog prices that have risen by 20% or more since last year bodes well for the world's largest pork producer, which is slated to announce first-quarter results September 8.


Margins industry-wide in the first quarter likely exceeded the normalised range of US$3 to US$7 per head, a strong recovery in which Smithfield "likely" outperformed the competition due to the company's focus on cost efficiencies, the analysts said in a note to investors. The leader in export market share with access to high-value markets such as Japan, Smithfield also "likely" benefitted from "very high" carcass values.


The pork cut-out value, meanwhile, rose 11% in the first quarter on the strength of ham and trim (among other parts) prices that increased amid tight supplies and strong export demand. Live hog prices also improved, and BB&T estimates that Smithfield earned US$15 to US$20 per head in HPG as a result. Below-market feed costs helped, too.


BB&T, predicting a typical seasonal decline in hog prices based on expected tight supplies and continued strength in export demand, estimates Smithfield can generate comparable hog-raising margins in the second quarter.


"Pork margins should remain solid; we have not projected much expansion in packaged meats profits as input costs have moved higher and retailers/consumers seem increasingly resistant to price increases," the firm said.


Concern about China's reliability as a buyer - especially with June sales declines in Japan, Mexico and Russia - has BB&T predicting that Smithfield's full-year earnings, while strong, will not match the company's 2011 performance.

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