Source: Janie Gabbett, MEATINGPLACE.COM, 3/16/09
Smithfield executives told analysts last week they would not be surprised if the hog operation portion of the company's vertically integrated structure lost money in 2010 and that the company is "taking a very serious look at whether we should be raising hogs just to raise hogs to sell to somebody else."
While the executives did not directly state they were considering selling any hog operations, Barclays Capital analyst Christopher Bledsoe indicated in a note to investors that it might be a good idea if they did.
"What's noteworthy about SFD's Hog Production operation is that, should this business find itself in a loss-making position in fiscal 2010, its divestiture would remove a drag on EBITDA and thus provide more, not less, interest coverage covenant flexibility," Bledsoe wrote.
Concerns over Smithfield's ability to maintain its debt load have dogged the stock over the past year.
"By divesting certain Hog Production assets — for instance, those in Utah, Texas, Oklahoma and Colorado that sell hogs to other packers — we believe SFD would be taking steps to preserve the remaining value inherent in operations it deems 'core,'" he added.
Bledsoe lowered his fiscal 2010 earnings forecast for Smithfield to 89 cents from $1.56 per share, citing concern about Smithfield's international unit and the fact that its hog unit is facing fiscal 2010 losses.
He's also not holding his breath. "In our view, management's commitment to this type of transformative action is far from certain," he wrote.
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