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Smithfield not to be underestimated, analyst says
Story Date: 1/4/2013
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Source: MEATINGPLACE, 1/3/13
One Wall Street analyst sees potential for a sharp bounce in the shares of Smithfield Foods in the year ahead, after investors punished the stock in 2012.
Strong demand for pork and an expected rebound in hog margins are among the reasons BMO Capital upgraded Smithfield Foods on Wednesday to “outperform.” Analyst Kenneth Zaslow predicted the shares could climb 30 percent, to $28.
After the upgrade, the stock was up 3.4 percent at midday Wednesday, to $22.30.
Smithfield’s shares fell 11 percent last year, while the S&P gained 12 percent. The slump accelerated in December, propelled by contraction in pork packer margins and the absence of hog liquidation, Zaslow said.
But the analyst predicts a recovery in hog production margins and ongoing strength in packaged meat margins will lift Smithfield’s fiscal 2014 earnings, which he now pegs at $2.84 a share. And he said that estimate may prove conservative.
Fueling Zaslow’s optimism are expectations for continued tight global hog supplies, resilient domestic pork demand, an available U.S. hog supply, growing export demand as the European Union cuts hog production by an estimated 5 percent, pork’s favorable position relative to beef, and the potential for lower corn prices in the summer.
The futures market is implying hog production margins of $10 per head in May, the analyst said.
Zaslow forecast Smithfield’s fresh pork margins at $7 per head, packaged meat margins at 15 cents per pound, hog production margins at $8 per head and international profits in line with recent years.
In addition, the company’s internal efforts, including share repurchases, hedging, a strong balance sheet and focus on packaged meats, are creating “earnings stability that has eluded Smithfield for more than a decade,” Zaslow wrote in a note to investors.
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