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Smithfield Profit Down on Disease Costs, Hog Prices

Reuters
Thursday, 29 Nov 2007 | 12:39 PM ET

Smithfield Foods, the world's largest hog and pork producer, reported a lower quarterly profit as lower hog prices, a tax loss, and costs related to swine disease in Romania hurt results.

Smithfield shares , however, gained as much as 3 percent in Thursday trade on the New York Stock Exchange.

The Smithfield, Va.-based company, which also produces Butterball turkeys, earned $17.4 million, or 13 cents per share, for the second quarter ended Oct. 28, compared with $44.7 million, or 40 cents, a year earlier.

The company said losses due to swine disease in Romania were $13 million while a tax loss due to foreign currency fluctuations totaled $25 million. Those items totaled 28 cents per share.

Minus the one-items, the earnings beat some analysts' expectations.

"Smithfield beat our 29 cent estimate by 13 cents, but it benefited from a one-time gain of 44 cents in hogs that was not explained in the press release," Pablo Zuanic, equity analyst at JPMorgan, said in a research note.

Wall Street analysts, on average, expected 21 cents per share, according to Reuters Estimates.

"With worsening trends in the January quarter, we would expect the stock to be down on what we see as a poor quality quarter," said Zuanic.

Revenue for the quarter was $3.46 billion, compared with $2.80 billion a year earlier.

"Hogs came in below on a very weak finish to the quarter in hog prices and no major impact from China, all other segments roughly in line to better when considering impact of some non-operating items," said Jonathan Feeney, equity analyst at Wachovia, in a research note.

The hog unit had an operating profit of $18.6 million, compared with $77.9 million a year earlier.

In August, Smithfield had announced a deal to sell 60 million pounds of pork to China with more deals likely. Since then no additional sales have been announced.

Smithfield has the largest hog herd in the United States, is part-owner of the largest turkey flock, produces beef, and is part owner of the nation's largest cattle feedlot operation.

A larger U.S. hog herd this year pressured hog prices throughout the country, while higher prices for corn, a key feed, increased production costs. Smithfield sells its hogs to its own plants as well as to competing pork plants.

Hog prices averaged $46 per hundredweight in the quarter versus $50 a year earlier, it said. Also, it said it cost $49 per hundredweight to produce them compared with $41 a year earlier.

The drop in hog profits was also due to the $13 million in costs in Romania related to liquidation of livestock inventory due to swine disease at three of the company's farms.

"Looking forward, the futures markets indicate continued near-term losses in hog production, but an improving environment as we move into our fiscal fourth quarter and beginning of fiscal 2009," C. Larry Pope, Smithfield's chief executive, said in a statement.

The lower hog results were largely offset by a $40 million increase in operating profit in the pork segment, the result of its expanded packaged meats business.

That was largely due to earnings from Premium Standard Farms, the smaller hog and pork producer that Smithfield bought in May, and to the addition of Armour-Eckrich meats, which were bought in October 2006.

"Unquestionably, the highlight of the quarter was the dramatic improvement in packaged meats," Pope said.

Operating profit in its beef unit dropped to $2.8 million from $6.0 million a year ago as high cattle prices pinched beef processing margins and high feed costs hurt cattle feeding results.

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