Smithfield Foods vouches for its liquidity

MILWAUKEE - Shares of Smithfield Foods Inc. soared on Thursday even as the pork producer reported a 76 percent drop in its fiscal second-quarter earnings due to high feed costs.

But the company, the nation's largest pork producer, said it is containing costs and expects hog production to turn profitable in the first quarter of fiscal 2010. It also said its liquidity — a big concern in the meat industry right now — is strong and if it were to violate its debt covenants, it would be able to get waivers from its lenders.

Shares of the Smithfield, Va.-based company rose $1.28, or 21.2 percent, to $7.42 in morning trading Thursday, as investors were encouraged by the liquidity and debt covenants news. The company's stock is off nearly 79 percent since January and has traded as high as $32.18 in the past 52 weeks.

The news comes just days after Pilgrim's Pride Corp., the nation's largest chicken producer, filed for Chapter 11 bankruptcy protection as it was hobbled by high feed costs and a high debt load.

Smithfield said it had more than $900 million in available liquidity at the end of the quarter on Oct. 26.

Profit in the second quarter fell to $4.2 million, or 3 cents per share, including a gain on the $580 million sale of its beef processing and cattle feeding operations. Losses from continuing operations totaled 21 cents per share, while analysts surveyed by Thomson Reuters expected a smaller loss of 10 cents per share. They typically exclude one-time items from their estimates.

Sales rose to $3.15 billion from $2.75 billion, helped by pork exports, but corn costs were 65 percent higher than a year ago and soybean meal costs surged 59 percent. Analysts expected sales of $3.2 billion.

Deutsche Bank-North America analyst Christina McGlone wrote in a note to clients that the company's 3 percent rise in pork volumes was solid but the pork sector's operating margin growth of 3.6 percent was slightly below her estimate of 4 percent.

She noted that the company's $58 million loss in hog production, due to high feed costs, was less than her $67 million estimate.

Meat makers have been hurt by high input costs, which reached their peak this summer. While prices have moderated, an oversupply of meat on the market limits their ability to raise prices. The company said it expects to have a 10 percent sow production cut by the end of January.

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