On September 8, 2011, the world’s largest pork and hog producer, Smithfield Foods Inc. (SFD) announced its financial results for the first quarter of 2012.
Earnings Review
Smithfield posted adjusted earnings of 69 cents per share for the first quarter of fiscal 2012, which surpassed the Zacks Consensus Estimate of 68 cents by 1.47%.
The record increase in pro-forma earnings for the fifth consecutive quarter was driven by strong packaged meats earnings in spite of higher raw material costs.
GAAP earnings were $82.1 million or 49 cents per share, up by 6.5% from the net income of $76.3 million or 46 cents per share in the year-ago quarter. The results include a $39.0 million charge for the company’s Missouri litigation, $5.7 million of Campofrio-related (CFG) transaction costs and Hog Production impairment charges of $4.3 million related to production cutbacks in Missouri.
In addition, the effective income tax rate was higher than the previously provided guidance and had an unfavorable impact on earnings.
The company’s results in the first quarter of fiscal 2012 were negatively impacted by a $39.0 million charge relating to its previously disclosed Missouri nuisance litigation.
(Read our full coverage on this earnings report: Smithfield Exceeds by a Penny)
Agreement of Estimate Revisions
Though the company posted robust earnings, the double-digit increase in raw material costs is reflected in the sentiments of the analysts. Out of the 15 analysts covering the stock, only 4 have revised their estimates upward for the upcoming quarter, while 7 showed a downward trend. Similarly for the next quarter, only one out of 15 analysts has raised his estimates, while 11 of them reduced their estimates.
For the current fiscal 2012, one out of 16 analysts increased his estimates over the past 7-day period, while 10 of them lowered their estimates. The same trend was seen for fiscal 2013, where 4 out of 13 analysts lowered their estimates with only one raising it.
Magnitude of Estimate Revisions
Therefore, there has been a significant shift in the estimates over the past week. The Zacks Consensus Estimate for the second quarter of fiscal 2012 has declined by 2 pennies to 67 cents. However, the fall was much higher for the third quarter of 2012, where the estimate declined from 63 cents to 50 cents. For fiscal 2012, the estimate plummeted to $2.30 from $2.48 a share, and to $2.43 per share in fiscal 2013 from $2.62 per share.
Our Recommendation
We believe that the company remains uncertain regarding its export demand in its fresh pork and hog production businesses, as there are weak signs of hog supply expansion in future.
Although management has undertaken restructuring initiatives in an effort to save costs and boost profitability, which augur well for future operating performance, the company remains concerned as high feed costs continue to pose a challenge for the company.
However, the company is working hard to expand its packaged meats business through brand activation and innovation, as the company has seen strong momentum in its Pork segment supported by solid brands and positive industry fundamentals. Therefore, Smithfield targets a 3% sales volume growth in the packaged meats business in fiscal 2012.
Further, the company’s vertical integration and product mix also help increase margins. Therefore, we maintain our long-term recommendation on Smithfield as Outperform, while the company has a Zacks #3 Rank, implying a short term Hold rating.
However, intense competition from other established players and cyclical nature of the company’s operations undermine its future growth prospects and profitability. The main competitors are Hormel Foods Corp (HRL) and Tyson Foods Inc (TSN).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
