A report released this week on the U.S. pork sector ended up pushing stocks lower for the likes of Smithfield Foods and Premium Standard Farms.
The report from a Prudential Securities' analyst, John McMillin, cited declining live-hog prices and "turmoil in global meat markets" as reasons to downgrade the two pork companies to "neutral." It pushed Smithfield shares down 4.6 percent to $27.53. Premium Standard Farms shares declined 4.1 percent to $14.03, reports Meatingplace.com
Specifically, McMillin pointed to issues for the coming year that are negative to protein prices. He projects declining prices for both pork and chicken "due to a combination of events, including Avian flu, increased weights and ongoing trade issues."
He also noted that the competitive strengths provided by vertical integration, which encompasses PSF and Smithfield, were "more evident when protein prices are high."
"Bottom line, it appears to us that Smithfield should be unlikely to have calendar 2006 earnings anywhere close to calendar 2005," he McMillin says. He projects the hit from price declines and market-hog inventories at $364 million or more than $2 per share.
His assessment for PSF is a bit more positive. "If hog prices fall as seen recently, this company can make more on the processing end to offset some of the reduction (in profits) in hog production."
He did acknowledge that U.S. pork export trends have been positive.
"But when hog prices are down, integrated companies lose a lot of competitive advantages; and that appears to be happening in early calendar 2006," says McMillin.