Smithfield stock downgraded as meat fundamentals worsen

Beef and pork fundamentals “decidedly worsened” over the past month amid soaring gasoline prices and persistently high unemployment, pinching the profit outlook for big meat processor Smithfield Foods Inc., agribusiness analyst Heather Jones said.

There was a “very significant slowdown” in domestic pork demand over the past few weeks, Jones said in a May 5 report. While pork exports have remained strong, foreign buying “does not seem to have accelerated as much as anticipated and has been unable to offset a seemingly softer domestic consumer,” she said.

“It is unclear whether this is a lasting phenomenon or a short-term pause reflecting initial consumer shock to high gas prices and the effect of a cool spring, among other factors,” said Jones, who’s with BB&T Capital Markets in Richmond, Va. Click here for her report.

Jones lowered her rating on Smithfield shares to “hold” from “buy,” and cut her fiscal 2012 per-share earnings forecast to $2.08 from $2.40 previously.

Eroding financial prospects for Smithfield add to recent troubling developments for U.S. beef and pork producers. Virginia-based Smithfield is the largest U.S. pork processor, and also fattens about 17 million hogs a year for slaughter.

Beef and pork producers mostly regained profitability last year following a recession-driven slump, helped by cattle and hog price rallies, but margins came under pressure this spring as corn surged to record highs.

Meanwhile, gasoline near or above $4 a gallon is pressuring consumer budgets, and with chicken still relatively cheap compared to beef and pork, analysts say demand for pricier steaks, burgers and chops may suffer.

“High gasoline prices have depleted disposable incomes, very likely reducing meat expenditures at both retail and foodservice,” livestock industry analysts Steve Meyer and Len Steiner said in a May 4 report. Also, “the cold spring has very likely delayed the grilling season, reducing the size of the normal spring demand increase.”

Livestock futures markets tumbled sharply this week amid growing concern over demand. Chicago cattle and hog futures are both down about 10 percent from record highs established last month.

The price drops reflect “some reckoning between the actual demand levels for meats and the demand levels being traded by the futures markets,” Meyer and Steiner said.

“While actual demands for pork, beef and chicken have been very good since last summer, these futures markets have been trading stupendous demand levels since that time,” the analysts said.

Jones said several factors prompted a “significant reevaluation” of Smithfield’s earnings outlook, including a 6-percent decline in wholesale pork prices from a mid-April peak and rising pork inventories in U.S. cold storage.

“Over the past month, fundamentals have deteriorated dramatically and there are indications that the pullback is not simply a short pause, but may reflect some slowing of demand,” Jones wrote.

Smithfield’s hog production business was still losing money at the end of 2010, though results improved from the depths of the industry-wide slump.

In the three months ended Jan. 30, Smithfield posted an operating loss of $2.3 million in hog production, even as the unit’s revenue rose 8.8 percent, to $649.9 million. During the same period a year earlier, hog production lost $78.1 million.

Smithfield shares rose 14 cents to $22.37 in early afternoon trading May 5. The stock is up 8.4 percent this year.

In late trading May 5, June lean hog futures traded at CME Group in Chicago rose 0.45 cent to 92.6 cents a pound, after earlier dropping to 91.35 cents, the lowest price since December. On April 20, hog futures touched a record high of $1.03435. CME hogs reflect carcass values.

June live cattle futures fell 0.2 cent to $1.1035 a pound in late trading May 5. Cattle futures on April 5 reached $1.22875, an all-time high based on the contract closest to expiration.

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