Smithfield Foods (SFD: Charts, News, Offers), the largest pork processor in the world, stands to profit handsomely from the congressional passage of multiple free trade agreements with South Korea, Panama and Colombia signed in October. The $12 billion Virginia-based global good company, known for its popular brands Farmland, Smithfield, Eckrich, Armour and John Morrell, stated that the new agreements will help “level the playing field” with foreign pork exporters. Shares of Smithfield have remained surprisingly resilient despite market turbulence, recovering all of its value since the summer crash in August. Investors had been concerned that prospective losses in its hog-production unit will cause losses down the road, with analysts cutting their average fiscal April 2012 profit forecast from $2.48 to $2.26 per share.
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The bears believe that Smithfield is headed for six months of losses starting in January due to the removal of favorable corn hedges from its balance sheet. Others were concerned if the company’s margins had peaked. Despite improvements over the previous year, its weaker-than-expected earnings on September 8 did little to inspire investor confidence, and shares slid 8% for the day. CEO Larry Pope sarcastically mocked the market response – “I apologize for the 50% improvement in net income,” he joked, “obviously, that’s not what the market was looking for.” To make matters worse, the Humane Society has now attacked Smithfield with allegations of animal cruelty in its facilities. These accusations are surprising, since Smithfield, which is one of McDonald’s (MCD: Charts, News, Offers) primary suppliers, had long been lauded for its sustainability efforts and advances in animal welfare. Animal rights organizations have alleged that Smithfield’s practice of placing pregnant sows in small individual gestation crates, which severely impair mobility, is inhumane. The Humane Society’s filing with the SEC reads, “Frustrated by this extreme confinement, some sows had bitten their bars so incessantly that blood from their mouths coated the fronts of their crates.” The organization also pointed to numerous other abuses, which are being investigated.
These bearish catalysts haven’t stopped insiders from backing up the truck on its own shares, however. Since the previous quarter, Pope has added 65,000 shares on the open market, worth $1.2 million, to his personal holdings. He now holds approximately 0.4% of the company’s total outstanding shares. Pope isn’t alone in his optimism. Former CEO and current Chairman Joseph Luter III, bought 200,000 shares on September 20 for $3.8 million on the open market. Luter’s purchase is extremely significant, since he had been an exclusive seller of Smithfield shares since 2004, selling several million shares. The company has remained profitable for five consecutive quarters since rising out of the ashes of losses totaling $299 million throughout 2009 and 2010. Pope has encouraged investors to look past the commodity-market prices of corn and pork and towards the company’s long-term business in retail packaged meats, where it has significant pricing power due to its size. In addition, the new FTAs will aid its continued strength in exports to Mexico, South Korea and China. “We’ve got a shortage of protein today,” stated Pope on the earnings call, “I think we’re going to have a bigger shortage of protein tomorrow.”
Smithfield is well-positioned to profit from the new FTAs, especially in the South Korean market. The U.S. Department of Agriculture estimates that meat and poultry exports to South Korea will increase by $2.1 billion annually. For the first time, large American pork processing companies such as Smithfield will be able to compete with global rivals on a “level playing field.” “These FTAs have the potential to generate hundreds of millions of dollars in U.S. pork exports in the coming years,” stated Pope, “while creating new jobs that our country desperately needs.” Shares of Smithfield currently nine times forward earnings with a PEG ratio of 0.86.
Other News About SFD
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Smithfield’s strong insider sentiment shouldn’t be ignored by investors.
Smithfield Foods CEO Pronounces FTAs as Major Victory for American Pork Industry
Pope lauds the U.S. government’s new free trade agreements.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
