Investopedia: Smithfield's Leverage High On The Hog

Take an unpredictable and cyclical business with narrow margins and then layer on a big dollop of debt and let the fun ensue. That's basically the recipe for Smithfield Foods (NYSE: SFD), for while this company is both the largest pork producer in the country and a well-run agribusiness in general, the combination of a low-margin business and a high-debt balance sheet makes this a never-boring play on protein.
  First Quarter Results a Little Undercooked
Smithfield reported that sales rose a little less than 7% for the fiscal first quarter, with the total revenue figure coming in just a couple of percentage points below the average estimate. Sales performance was driven by the pork business (as it virtually always is), and pork revenue rose by 7.6%. Like Hormel (NYSE: HRL), Smithfield understands the virtues of a solid branded/packaged product business, and although packaged pork sales growth trailed the company average (6.4% versus 6.7%), it's still a significant contributor.

Fresh pork saw nearly 9% growth, though volume was down about 2%. Margins were at the high end of the company's historical range. On the packaged side, margins too were above normal levels and the company's sales growth was a byproduct of pricing (up 8%) offset by volume (down 1%).



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Investopedia: Don't Get Piggish With Smithfield Foods

Protein stocks can be some of the most irritating stocks for an individual to consider. So much of what determines success at companies like Smithfield (NYSE:SFD), Tyson (NYSE:TSN), and Pilgrim's Pride (NYSE:PPC) is out of their control and all but impossible to predict. What's more, successful trading often demands selling when things look great and buying when things are terrible - old advice to be sure, but nevertheless still hard for many investors to follow. 

With Smithfield Foods posting its first full-year profit in a few years, and the stock up nicely relative to the S&P 500 over the last two years, investors might be wise to question whether this is a stock they want to hold for the full cycle or whether it may be time to move on to greener pastures. While protein consumption seems to be on an inexorable climb around the world, agriculture is still unpredictable and protein stocks are still tough candidates for long-term sleep-well-at-night investing.

A Good End To The Year

Smithfield Foods certainly brought home some good results for the end of its fiscal year. Revenue rose more than 7%, as Packaged Meat pushed Pork Processing to a double-digit increase and offset weaker performance in Hog Production. One potential concern comes from the volume figures - across the board volume was weak, as fresh pork volume dropped 9%, packaged meat volume fell 2%, and hog production volume fell 9%.


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(Repost) Investopedia: Does Tyson Deserve Better?

Tyson (NYSE:TSN) is a tricky stock. Commodity food producers like Tyson almost never get the valuation that packaged food companies like Hormel (NYSE:HRL) and General Mills (NYSE:GIS) carry. Even with that being said, though, Tyson has shown itself to be relatively less volatile than other protein producers but still gets no premium for that distinction. If Tyson can somehow maintain its current levels of free cash flow production, this is a stock that value investors should seriously consider.


Very Mixed Performance for Q2
Tyson's fiscal second quarter was a real mixed bag - solid top-line performance, but not a lot of great news on profitability. Tyson reported that revenue grew about 12% in the second quarter, comfortably above the average analyst estimate. Growth was consistently positive across the board, with the company's large beef operations showing 19% revenue growth and the pork business jumping 26%. Even as a laggard, the poultry business was still up 10%.

Profits were not nearly so solid. Gross margin slid to 6.7% from 8.2% a year earlier; not a surprise, given the increase in grain, energy, packaging and other inputs. Operating income fell 12% from last year, and the operating margin compressed by 1.2%. Although operating income in the pork segment more than doubled (and margins were better than 10%), the profit in beef fell by a quarter and poultry income dropped nearly 68%.


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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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