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Analyst lowers Smithfield outlook on weaker hog margins
Story Date: 6/6/2012
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Source: Rita Jane Gabbett, MEATINGPLACE, 6/6/12
BB&T Capital Markets analyst Heather Jones has lowered her fourth quarter 2012 earnings forecast for Smithfield Foods based on lower than anticipated margins for the company’s Hog Production Group (HPG).
BB&T reduced its fourth quarter earnings forecast by 4 cents per share to 44 cents and lowered its fiscal 2013 forecast to $2.18 from $2.25 per share.
In a note to investors, Jones noted that even as hog margins have improved over the past week with cutout up 5 percent in four days — driven by stronger ham and belly prices — fundamentals are still weak.
She cautioned that fresh pork margins still solidly in the red and very large cold storage inventories (up 30 percent on a two-year basis) “should arguably limit the magnitude and staying power of any rally over the next few months…. Retail demand has been challenging, which may hamper packaged meat demand.”
Based upon the current futures prices, she estimated Smithfield’s HPG margins at an average loss of $2 to $3 per head through April 2013. Jones said BB&T’s 2013 estimate is based upon essentially breakeven HPG margins.
Despite speculation that demand at retail could benefit from increased feature activity, she noted the data shows features are not up meaningfully from last year and while some promoted price points in recent weeks are down year over year, some are up meaningfully.
Finally, the evidence is clear that pork export demand has slowed and, barring a supply shock, is unlikely to show resurgence over the next few months, Jones added, particularly with China currently enjoying ample pork supplies.
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