A recent sell-off in Smithfield Foods is overdone, one analyst says.
Shares of Smithfield rose initially Wednesday as BMO Capital Markets' Kenneth Zaslow raised his rating for the world's biggest hog producer. He said the September drop in the stock is an overreaction to lower hog prices, and provides an attractive entry point to buy the stock.
THE SPARK: Zaslow said in a client note that the industry seems to be concentrating more on the eventual recovery of the chicken market and mostly ignoring pork. This has sent shares of Sanderson Farms Inc. ( SAFM - news - people ) and Pilgrim's Pride ( PPC - news - people ) Corp. higher in September, while Smithfield Foods ( SFD - news - people )' stock has dropped 13 percent since the start of the month, he explained.
Because of that, Smithfield's shares are now off 6 percent for the year to date. Sanderson Farms, meanwhile, is up 17 percent for the same period. Pilgrim's Pride's stock is down 45 percent for the year to date, even with a 10 percent increase this month.
THE BIG PICTURE: Earlier this month Smithfield Foods reported that its fiscal first-quarter net income by 8 percent, but the company - whose 12 brands include Armour, Farmland and Smithfield - cautioned that high feed costs will remain a problem this year.
THE ANALYSIS: Zaslow says Smithfield Foods' fresh pork margins have outperformed the industry over the last six quarters. Hog production margins are also likely to rise on limited hog production, strong export demand and solid U.S. demand, he added.
A shift by consumers to packaged meats will also continue to help the Smithfield, Va. company. This is evidenced in part by its 25 percent increase in retail bacon sales over the past 12 weeks, according to Zaslow.
About three weeks ago Smithfield Foods said it expects to sell 3 percent more packaged meat in fiscal 2012 than it did during the last fiscal year. The analyst lifted Smithfield Foods to "Outperform" from "Market Perform" and kept a $24 price target.
SHARE ACTION: Smithfield Foods' stock was up 3 cents to $18.82 in morning trading, after gaining 2.2 percent just after the market opened. Smithfield shares have traded between $14.82 and $24.93 over the last year. Shares of Sanderson Farms, Pilgrim's Pride, Tyson Foods ( TSN - news - people ) and Hormel all were lower.
Copyright 2011 The Associated Press.