Source:  LIsa M. Keefe, MEATINGPLACE.COM, 4/26/10

Higher hog prices are bad news in the short run but good news in the long run for Smithfield Foods Inc., JP Morgan analyst Ken Goldman said.

In a note to investors, he lowered his estimate for Smithfield's earnings per share in the fourth quarter to just 16 cents per share, from his earlier projection of 42 cents per share. At the same time, however, he bumped up his earnings projections for fiscal 2011 to $2.14 per share for the year, from his previous level of $2.02.

"Indeed, the only reason why [fourth quarter 2010] will suffer from [Smithfield's prices hedges] is that hog prices leaped faster than expected," he noted.

Still, Goldman indicated that the lack of information about Smithfield's hog hedges, and how much they may affect earnings in the fourth quarter, means that his projection likely is not precise. "[W]e would not be surprised by an actual number as low as [0] or as high as [about] 30 cents," he wrote.

Over time, Smithfield stands to gain much more from higher hog prices boosting performance of its hog production units than it will lose in margins on its production business. And it appears that hog prices will remain relatively high for some time: "Demand for pork is very strong right now, thanks in part to new breakfast offerings from QSRs that require a great deal of bacon and sausage," Goldman wrote.

Goldman met with Smithfield management last week, just as the company issued a note of caution on its upcoming fourth-quarter results.

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