QUOTE AND NEWS
DailyFinance  May 15  Comment 
Verizon Wireless: WHO:Verizon Wireless, operator of the nation’s largest and most reliable 4G LTE network. WHAT: Verizon Wireless recently expanded fourth generation (4G) Long Term Evolution (LTE) network ...
SeekingAlpha  May 14  Comment 
Smithfield Foods, Inc. (SFD) Q1 2014 Results Earnings Conference Call May 14, 2014 08:00 AM ET Executives Keira Lombardo - VP Investor Relations Ken Sullivan - Chief Financial Officer Bo Manly - EVP and Chief Synergy Officer ...
Agriculture Online  May 14  Comment 
The pork giant acquired by a Chinese company last year saw record-high quarterly income in the first quarter of 2014, company officials say.
Wall Street Journal  May 14  Comment 
Smithfield Foods said its first-quarter profit surged as the pork processor benefited from strong demand for fresh pork
Cloud Computing  Apr 30  Comment 
Fidelity Institutional, the division of Fidelity Investments® that provides clearing, custody and investment management products to registered investment advisors (RIAs), banks, broker-dealers and family offices, today...
New York Times  Apr 29  Comment 
Delaying the offering gives the pork producer WH Group time to further integrate Smithfield and prove that it is worth a full-fat valuation, says Una Galani of Reuters Breakingviews.
SeekingAlpha  Apr 29  Comment 
By Peter Fuhrman: There will be an awful lot of embarrassed financial professionals sulking around Hong Kong and Wall Street today. The reason: a crazy IPO deal financially-engineered by a group of big name investment banks, led by Morgan Stanley...
Financial Times  Apr 15  Comment 
World’s top pork producer swings to a net loss in 2013 thanks to over $600m in share-based payouts to staff following Smithfield takeover
guardian.co.uk  Apr 14  Comment 
WH Group chief executive and executive director receive large sum in shares for role in Smithfield Foods acquisition Two executives at the Chinese company that bought the US firm Smithfield Foods, the world's biggest pork producer, last September...




 

Smithfield Foods (NYSE:SFD) is the world's largest hog producer and slaughterhouse, also known as a pork processor. Approximately half of Smithfield's profits come from processed meats sold under one of Smithfield Foods' private brand names, a percentage that the firm hopes to increase in the future. These products are sold at higher margins, even in times of rising commodity prices - whereas fresh meat is sold to butchers, who then mark up the product to earn a profit. Processing the meat itself allows the company to earn maximum profit from each sale and to pass a higher percentage of input costs onto consumers. The company earned $11.2 billion in revenue but incurred a net loss of $101 million in 2010.[1]

By vertically integrating its hog production and processed pork segments, Smithfield is insulated from the hog commodity market. It is not, however, insulated from feedstuff commodity prices, like grain, since 60-65% of the cost of raising hogs is feedstock prices. Corn makes up 85% of a pig's diet, and demand for corn, spurred by ethanol production as well as an expanding global population, has led corn prices to rise nearly 60% since 2007. Increased commodities prices depress margins as Smithfield Foods is unable to completely pass on feed prices to consumers.

Company Overview

Smithfield Foods operates in four segments: pork (its largest segment), international, hog production, and other (turkey production):[2]

Pork

The pork segment consists of fresh pork and packaged meat. Smithfield is shifting strategy towards its packaged meat business, due to the higher margins of private labels. Meat is sold under Smithfield, Farmland, John Morrell, Gwaltney, Great, Cumberland Gap, Armour, Eckrich, Margherita, LunchMakers, and Dinner Bell, among others. The pork segment procures about 52% of hogs from the hog production segment and the rest from the hog spot market.

Hog Production

The hog production segment consists of raising and selling hogs. It has approximately 900,000 sows producing 14 million market hogs annually, making it the largest producer of hogs in the world. By integrating this segment with the processed pork segment, Smithfield Foods hopes to use economies of scale to decrease the hog cost for each.

International

The international segment consists of several international meat processing operations. Smithfield has controlling interests in processing plants in Poland, Romania, and the United Kingdom, and smaller interests in plants in Western Europe, Mexico, and China.

Other

The other segment consists of turkey production relating to the 49% stake that Smithfield Foods owns in the Butterball company.

Business Growth

FY 2010 (ended May 2, 2010)[1]

  • Net sales fell 10% to $11.2 billion. The company attributes the decline to lower sales volume created by the sluggish economy.
  • The company incurred a net loss of $101 million, an improvement over the net loss of $198 million in the previous year.

Trends and Forces

  • Rising Feedstuff Prices Cut Smithfield Foods' Margins as Corn Is 85% of a Pig's Diet: Smithfield Foods is heavily dependent on favorable pricing of feedstuff, such as corn prices and soybeans, as well as hog and cattle prices. Corn prices have risen sharply since the beginning of 2007, as ethanol producers have increased their demand for the commodity (rising oil prices, in turn, have increased demand for ethanol). Smithfield Foods engages in various hedging activities to "lock in" to current prices and protect itself from price increases. It does this by buying forward grain contracts at current prices. This means the company is protected in the case of raising prices, but is also liable in the case of falling prices because it will continue to pay the contracted rate. Any long-term, significant increase in feedstuff prices has the potential to seriously depress margins and reduce profitability. Though hog prices have steadily declined, Smithfield Foods is insulated from price increases by supplying its processed pork segment with lower priced hogs from its hog production segment.
  • Smithfield Foods Has Significant Exposure to Several Customers: Smithfield's top ten customers, including McDonald's (MCD) , Subway, and Wal-Mart Stores (WMT), represented 26% of net sales. However, Smithfield does not have long-term sales agreements with any customers and does not, therefore, have a guaranteed source of revenue. The loss of one of these top customers would have a significant impact on Smithfield's balance sheet.
  • Smithfield's Transition towards Value-Added Meats Will Increase Margins: Smithfield Foods is looking to increase revenue from processed meats (currently just over half of revenues). These products carry a higher margin than fresh pork, because they are sold one step closer to the consumer on the supply chain - to stores, rather than to butchers who then mark up the meat once again before selling to stores. Rising commodity prices factor into the price that consumers must pay for their pork, but these input costs cannot be passed on in their entirety. By eliminating an extra step in the sales process, Smithfield can pass a higher percentage of production costs onto the consumer as well.

Competition

Smithfield Foods is currently the world leader in hog production and has 25% of the market share in United States pork.

References

  1. 1.0 1.1 SFD 2010 10-K "Selected Financial Data" pg. 28
  2. SFD 2010 10K "Description of Segments" pg. 5-8
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