December 9, 2011

Smithfield Foods' Q2 profit down 16%

Smithfield Foods Inc.'s fiscal second-quarter earnings dropped 16% with a significant jump in input costs.

Smithfield--whose brands also include John Morrell, Armour and Farmland--has seen its revenue grow in recent quarters on strong demand from foreign markets. But like other livestock producers, the company's bottom line faces challenges from persistently high feed costs.

Smithfield has warned that its hog-production business could face losses in the fiscal third and fourth quarters as corn costs jump and prices for animals fall on a seasonal basis. But Standard & Poor's Ratings Services said in October it expects higher pricing for hogs and pork to help Smithfield sustain its current level of adjusted earnings for the rest of the fiscal year, despite possible pressure from slower economic growth and sustained higher feed costs. On that opinion, S&P also raised its rating on Smithfield a notch to double-B-minus, which is still three steps below investment-grade status.

For the quarter ended October 30, Smithfield reported a profit of US$120.7 million, or US$0.74 a share, down from US$143.7 million, or US$0.86, a year earlier. Excluding early debt-extinguishment charges and other items, earnings fell to US$0.76 from US$0.80. Sales jumped 10% to US$3.31 billion.

Analysts polled by Thomson Reuters had most recently forecast earnings of US$0.70 on revenue of US$3.21 billion.

Gross margin fell to 12.7% from 14.4% as input costs jumped 13%.

Total pork sales--the biggest contributor to Smithfield's revenue--rose 12%, reflecting an increase of 18% for fresh pork and 6.9% for packaged meats. Packaged foods is a key area of expansion for many meat companies, including Smithfield, as branded and packaged meat products are typically more profitable than sales of commoditized products like live animals and fresh meat. Smithfield backed its full-year forecast of 3% sales volume growth for packaged meats.

The hog-production segment's sales jumped 11%, while its international business saw 19% growth.

Shares closed Wednesday at US$24.93 and were inactive premarket. The stock has risen 21% so far this year.