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Analyst cites weak pork margins; reduces Smithfield earnings forecast
Story Date: 4/30/2013
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Source: Rita Jane Gabbett, MEATINGPLACE, 4/29/13
BB&T Capital Markets analyst Heather Jones lowered her fiscal fourth quarter 2013 and 2014 annual earnings forecasts for Smithfield Foods, citing weaker than anticipated fresh pork margins and hog pricing during the quarter.
Despite the reduced earnings forecast, Jones maintained her “buy” recommendation on Smithfield shares as upside potential outweighs downside because fundamentals are at or near a trough; valuation is far from excessive; and, “even if nothing comes of Continental Grain's activist overtures, their shot across the bow introduced the prospect of activism, which should underpin valuation,” she wrote in a note to investors.
Jones reduced her fourth quarter fiscal 2013 earnings estimate to 31 cents per share from 42 cents per share earlier and her 2014 full year forecast to $2.17 from $2.35 earlier.
In terms of industry fundamentals, Jones noted weakened pork exports to Japan, Russia and China for various reasons. She also said lower prices have not stimulated a meaningful increase in domestic demand to date and inventories have swelled considerably to multi-year highs. “However, we do not envision a meaningful supply response from the industry due to the prospect of much lower feed costs,” she wrote.
On the positive side, she projected that export headwinds are likely short-term and U.S. pork over time will benefit from a generally upward trend in global protein demand. In addition, while domestic demand is unlikely to surge, it could strengthen on increased featuring, as the relative price relationship between pork and poultry breast meat is favorable. Also, it is increasingly likely that corn prices are headed down further.
On a company-specific basis, Jones predicted Smithfield would likely reduce costs in its fresh pork/packaged meats operations, as well as in hog production.
“Finally, as stated in previous reports, we are of the view that Smithfield's price premium will expand due to its singular ability at present to supply large quantities of group-housing pork,” she concluded.
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