Smithfield Foods Inc. (SFD) 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 proforma earnings for the fifth consecutive quarter was driven by strong packaged meats earnings in spite of higher raw material costs.
GAAP earnings were reported at $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.
Quarterly Sales Details
During the quarter, total sales recorded a decent year-over-year increase of 7.1% to $3.1 billion from $2.9 billion in the prior-year quarter. The improvement was primarily attributable to higher average unit selling prices in the Pork segment and higher Live Hog market prices. Total sales were in line with the Zacks Consensus Estimate of $3.13 billion.
Segment and Margin Details
Pork: On a reported basis, sales of the pork segment recorded a robust 7.6% growth from the previous year to $2.6 billion. The improvement was fuelled by a 8.9% growth in the fresh pork section and a 6.4% growth in packaged meats.
Operating profit in the pork segment increased 20.7% to $136.7 million in the first quarter of 2012. Operating margin however remained flat at 5% in the quarter on the back of a better margin in the packaged meat sections and a weaker margin in the fresh pork section in the current quarter.
Operating margin in Fresh Pork was 3% in the quarter, despite a 19% increase in live hog market prices. Results were bolstered by stable protein supplies and solid exports. Operating margin in Packaged Meat was 8.0% in the quarter, benefiting from lower overhead costs and increased operating efficiencies, despite a double-digit increase in raw material costs.
Hog Production and International: Hog Production posted a decent year-over-year growth of 15.7%. Excluding the litigation settlement and impairments, the segment’s operating margins were 14%, which were favorably impacted by profitable hedges placed earlier in the year for grains and hogs.
International segment also reported a sales growth of 18.6% in the first quarter of 2012. Operating profit in the International segment was down in both Europe and Mexico, on the back of recessionary conditions coupled with higher raw material prices in the hog production and meat processing operations.
Smithfield’s gross profit shot up by 10.7% year over year to $407.1 million. However, selling, general and administrative expenses increased 18.8% from the previous year. Therefore, operating profit declined 2.5% to $173.2 million, including litigation charges. Excluding these charges, operating profit increased 25% to a record $222.2 million in the first quarter of 2012.
Other Financial Details
During the quarter, Smithfield has utilized its excess cash to redeem the remaining $78 million of its outstanding 2011 bonds, repurchase $34 million of stock and invest an additional $100 million in pension plans, all the while maintaining over $1.2 billion in liquidity.
Subsequent to quarter end, the company repurchased $31 million of additional shares and redeemed $13.1 million of its highest coupon bonds.
Outlook
The company announced that it 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.
In addition, the company believes that export demand in its fresh pork and hog production businesses will continue. However, there are weak signs of hog supply expansion in future. High feed costs will continue to pose a challenge, but the company now expects to hedge rising costs in the mid-to-high $60s per hundred weight for fiscal 2012.
Smithfield, together with its subsidiaries, engages in the production of hog, and processing of pork and beef worldwide. The company offers fresh pork products, packaged meat products, dry meat products and ready-to-eat foods. Smithfield Foods is also involved in turkey production and hatchery operations.
Management has undertaken restructuring initiatives in an effort to save costs and boost profitability, which augur well for future operating performance. Further, the company’s vertical integration and product mix help increase margins. 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 (HRL) and Tyson Foods (TSN).
