Smithfield's Good Times Won't Last

This has been a good year for pork and beef producers, particularly since the summer months. Stocks like Smithfield (NYSE:SFD), Tyson (NYSE:TSN), Hormel (NYSE:HRL) and Zhongpin (Nasdaq:HOGS) have all seen double-digit stock appreciation and have beaten the market by a pretty healthy margin. Unfortunately, history strongly suggests that these good times will not last, so investors need to really give careful thought to whether they want to jump on board at this point in the cycle.

A Quarter that was Good Enough
Although the world's biggest hog raiser and processor did miss the consensus top line estimate, Smithfield nevertheless did have a respectable second quarter report. Revenue rose 11% to just under $3 billion, with a big jump in revenue from hog production and double-digit growth overall in the pork business.

Profitability is where the story really gets good for this quarter. Gross margin more than doubled from the year-ago period, and operating profit rose substantially. While corn prices are at the highest levels since the summer of 2008, and corn is a major component of feed costs which are a major component of Smithfield's costs, the company nevertheless has a favorable grain cost position at present. That allowed the company to earn a record per-head profit of $16 in the fresh pork business. 


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