Source:  Lisa M. Keefe, MEATINGPLACE.COM, 12/4/09

Citing the likelihood that Smithfield Foods' packaged meats business will see thinner margins, BB&T Capital Markets equity analyst Heather Jones reduced her earnings per share estimates for the pork giant in the second quarter and full year fiscal 2010, ending in April.

At the same time, she increased her earnings per share estimates for the company's fiscal 2011, she wrote in a note to investors.

Jones now expects Smithfield to post a per-share loss in its second fiscal quarter, ending in January, of 43 cents a share, down from her earlier expectation that the company would post earnings in the quarter of 29 cents per share. Her full fiscal year estimate, then, has dropped to a loss of 93 cents per share.

For fiscal year 2011, however, Jones increased her earnings per share estimate to $1.18. She did not change her rating on the stock, which is "hold."

"Packaged meat profitability will likely decline as higher hog prices more than offset cost savings from the restructuring plan, and significant further improvement in projected hog production profitability is reliant upon significant demand improvement and/or more liquidation. … Further, the benefit from liquidation to date is likely to be more delayed than expected, as we believe it has been fueled by significant gilt kill, rather than currently productive sows," she wrote.

Jones noted that bankruptcies among hog producers is encouraging, from the point of view of hog prices. Still, she noted, "We … understand that some relatively large producers are in dire straights," even in the wake of the bankruptcy of Coharie Farms.

Given that hog production still is high, "We believe demand must improve considerably from here to sustain hog futures prices and drive further increases. The weak [U.S. dollar] should help export demand, as should the recent re-opening of China," she wrote.

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