Source:  MEATINGPLACE.COM, 1/19/11

Wall Street gained insight into operations at Smithfield Foods this week when the company detailed its strategic plans for pork, hog production and hedging at its first investor day event.

“We gain confidence in SFD's ability to deliver its FY2011 and FY2012 outlook in light of its shift toward value-added products, a structural improvement in fresh pork, export demand, and hedges; however, SFD appears to be almost managing its hog production business 'not to lose money,’" said BMO Capital Markets analyst Kenneth Zaslow, who rates the stock “market perform.”

Smithfield should be marginally profitable with corn at $6 corn, reflecting hog prices and current hedges that extend through the crop year, Zaslow said. Smithfield does not expect an increase in hog supplies in the near term, Zaslow noted, while the company’s chief hedging officer expects upside to corn prices in near term but a reversion to fair value at $4.50-$5.00.

The company is also aggressively expand its value added product mix, expects pork export demand to increase 10 percent, is deleveraging its balance sheet, and is open to bolt-on acquisitions, Zaslow noted.
J.P. Morgan analyst Ken Goldman, who rates the shares “neutral,” said Smithfield may break even in hogs, even with corn at $6.50.

He noted that management reinforced its message that the company should be judged more as a pork processor than as a hog farmer and played down the possibility of acquiring Sara Lee's meat lines, saying the company was not interested in overpaying for the brands.

Stephens Inc. analyst Farha Aslam, who has an “overweight” rating on the stock,” said Smithfield is well positioned to deliver record fiscal 2011 earnings of $2.65 a share as it changes its business model to better integrate operations across divisions, focus on profitable growth rather than volume and actively hedge hogs and grains.

Fresh pork profitability is excellent, Aslam said, with margins averaging $14 per head and likely to average $10 a head for the full fiscal year. Margins are benefiting from tight U.S. supplies, strong domestic and international demand, high beef prices and discipline among pork processors following Smithfield’s closure of its Sioux City facility.

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