Smithfield Foods Inc. (SFD) posted robust earnings of 84 cents per share for the third quarter of fiscal 2011. The result surpassed the Zacks Consensus Estimate of 66 cents by 27.3%.

GAAP earnings per share was reported at $1.21 per share, up by 4.5% from the year ago quarter. The record increase in proforma earnings was driven by the strength of Pork segment, which benefited from favorable market conditions. Strong global demand for pork propelled exceptional fresh pork results in the quarter.

Quarterly Sales Details

During the quarter, total sales recorded a decent year over year increase of 10.3% to $3.2 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 the Zacks Consensus Estimate of $3.16 billion.

Segment and Margin Details

On a reported basis, sales of the pork segment recorded a robust 11.9% growth from the previous year to $2.7 billion. The improvement was fuelled by a 17% growth of packaged meats and 5.2% growth in the fresh pork section.

Hog Production and International segment also posted a decent year on year growth of 8.8% and 5.1% respectively. Other segment however plunged by 52.9% from the year ago period.

Smithfield’s gross profit shot up by 60.9% year-over-year to $457.2 million. Selling, general and administrative expenses increased 13.3% from the previous year. Therefore, operating profit was reported at $372.7 million up from $96.5 million recorded a year ago.

Operating profit in the pork segment increased to $254.8 million from $152.8 million in the previous year. Operating margin in the segment rose to 9% from 6% in the same period a year ago in the back of strong margins in the fresh pork and packaged meat sections.

Closure of the Sioux City, Iowa plant in April 2010 backed the volume decrease of 4% and 2% in the fresh pork and packaged meat segments respectively.

Operating margins in Hog production improved significantly owing to fewer hog supply that led to rise in market prices. The international segment continued to deliver strong result consistently, backed by decent performance in Campofrio, but partially offset by Romania and Polish States.

Outlook

The company announced that it is focused on develop its sales and marketing programs and consolidated brand portfolio, as well as further improving its cost structure in the pork segment. Management also anticipates Hog Production segment to be profitable in fiscal 2011 backed by low global red meat inventories.

Furthermore, the company expects the Hog Production Cost Savings Initiative to improve cost structure by fiscal 2014. Smithfield reduced debt by $913 million this fiscal year, bringing the total debt level to $2.1 billion.

Smithfield, which competes with Hormel Foods Corp. (HRL), holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, with a short-term Hold rating.

 
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