Source:  Lisa M. Keefe, MEATINGPLACE, 6/16/11

Smithfield Foods Inc. reported record financial results for its fiscal 2011, ended May 1, with net income of $521 million, or $3.12 per share, on sales of $12.2 billion.

For the fourth quarter, Smithfield earned $98.4 million, or 59 cents per share, on consolidated sales of $3.1 billion. It was the fourth consecutive quarter of record year-over-year earnings.

Much of the credit goes to the company’s pork segment, for which earnings improved 77 percent over fiscal 2010, the packaged meats segment and exports, CEO C. Larry Pope said in a conference call with analysts and the media to discuss the results.

“The fundamentals have been very good for most of this fiscal year, mostly related to the fresh pork complex, bolstered by the strong export environment as well as some changes relative to supply and demand” in the domestic market, Pope said.

Closing the company’s facility in Sioux City, Iowa, made a difference to the market in the United States “almost immediately,” Pope said.

Fat margins
“I’ve never seen margins at this level for this length of time” in the fresh pork business, he added.
In packaged meats, Smithfield has been successful in passing increased raw materials costs through to the consumer. The strength of the company’s consumer brands is clear, Pope said, in the double-digit increases in volume in its branded products; Smithfield plans to increase its spending on consumer marketing by 18 percent in fiscal 2012.

Even Smithfield’s hog production unit is profitable, despite an increase in corn prices.

“We have nice hedges and we expect hog production to remain profitable through the next fiscal year,” Pope said. He later indicated that Smithfield has hedges for about half of its corn needs at below-market prices and “protection for the whole year.” After the run-up in corn prices in 2008, and their subsequent fall, Smithfield found itself struggling with expensive contracts for much of its feed, which took a toll on the bottom line for more than a year.

Campofrio
Pope revisited his recent decision to end Smithfield’s bid for Spain’s Campofrio, of which Smithfield owns 37 percent. He emphasized that the decision was due to “turmoil” in western Europe, and not because Campofrio itself had significant operating problems. “We have a continuing interest in it, but the timing on the transaction wasn’t right and I won’t go back to it until I have better clarity on where the western European markets are going to go,” he said.

Meanwhile
In addition to improved operating results, Smithfield reduced debt by repurchasing $391 million of 2013 and 2014 notes in fourth quarter. It also retired $913 million of total debt during fiscal year, improving liquidity and lowering interest expense.

Smithfield Foods on Thursday also announced a share repurchase program of up to $150 million of its common stock over the next 24 months. The company intends to buy the stock using cash on hand. The new authorization replaces a previous share repurchase program.

“We think the stock is significantly undervalued,” Pope said. “We could be on a share buyback program very quickly.”

Analysts’ response
After the call, JPMorgan equity analyst Ken Goldman increased his fiscal year 2012 earnings estimate to $2.38 per share from $1.97. He introduced a fiscal 2013 estimate of $1.47 earnings per share.

“The tone regarding FY12 was confident,” Goldman wrote of the conference call. “At one point … CFO Bo Manly said that with hard work and a little 'luck,’ Smithfield’s fiscal 2012 performance could match or beat fiscal 2011. … We are raising our FY12 estimate to account for longer and better hedges than we previously believed. However, we introduce a FY13 estimate of $1.47 that incorporates much more expensive corn than what the company currently is buying."

Deutsche Bank’s Christine McGlone also wrote a report on Smithfield’s results, but was not moved to change her earnings projections for fiscal 2012 from $2.73 per share.

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