Fitch: Hillshire, Tyson Viewed As Fierce Value-Added Competitors
NEW YORK -- January 10, 2013
Fitch Ratings views Smithfield Foods, Inc.'s (SFD: Smithfield; not rated) goal
of further expanding into branded packaged meats, with vertical integration in
hog production, as strategically sound but significant further growth without
acquisitions may be challenging. We do not believe a breakup of the company is
likely given this strategy and expect volatile operating earnings in commodity
operations to overshadow the firm's progress in higher-margin packaged meats.
Vertical integration in hog production provides Smithfield control over its
supply, providing traceability and sourcing to manage ongoing cost volatility
in its packaged meats operation. However, cash flow volatility in hog
production and fresh pork may limit Smithfield's ability to investment
meaningfully in research and development, marketing, and advertising. Such
spending is necessary to compete effectively in packaged foods, particularly
on a national scale.
We withdrew our 'BB' issuer default rating on Smithfield on Oct. 31, 2012 but
continue to rate Tyson Foods, Inc. (TSN: Tyson; rated 'BBB' with a Stable
Rating Outlook) and Hillshire Brands Co. (HSH: Hillshire; rated 'BBB' with a
Stable Rating Outlook). Both Tyson, which is one of the world's largest meat
protein companies and a major competitor of Smithfield, and Hillshire are
focused on investing and growing in branded packaged meats and value-added
Tyson is targeting sales growth of 6%-8%, inclusive of bolt-on acquisitions,
in value-added poultry and prepared foods over the next three years. During
fiscal 2012, approximately $15.0 billion of Tyson's $33.3 billion of revenue
was from value-added poultry and prepared foods products but the firm also
sells a meaningful amount of value-added beef and pork.
Hillshire generated $4.1 billion of total revenue in fiscal 2012, with retail
sales of packaged meats products, under national brands such as Hillshire
Farm, Jimmy Dean, and Ball Park, representing the bulk of those sales. The
company's corporate top-line growth target is 4%-5% annually (including 2%-3%
volume growth) by fiscal 2015.
Smithfield's packaged meats business, which consists mainly of regional
brands, has grown 17% since 2010 to $6 billion of annual sales for fiscal
2012, or 46% of the firm's $13.1 billion total. Normalized operating margins
for packaged meats range from 5%-8%, based on the 2.7 billion pounds of
product sold in 2012, or $0.12-$0.17 per pound and can be twice as high as
those in fresh pork. We view margin pressure as a risk for the packaged meats
firms in calendar 2013 given still-elevated corn prices and upward pressure on
the cost of livestock.
For additional information see:
"2013 Outlook: U.S. Commodity Protein, Produce, and Dairy: Pricing and
Efficiency Becomes Paramount as Additional Divestitures/Spin-Offs are
Limited," Dec. 13, 2012.
"2013 Outlook: U.S. Packaged Foods - Prioritizing Acquisition Integration and
Debt Reduction, but Hunger for Growth Remains," Dec. 13, 2012.
Additional information is available on www.fitchratings.com.
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Carla Norfleet Taylor, CFA, +1 312 368-3195
70 W. Madison Street
Chicago, IL 60602
Judi M. Rosetti, CFA/CPA, +1 312 368-2077
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Kellie Geressy-Nilsen, +1 212 908-9123
Brian Bertsch, +1 212 908-0549
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