There is a stock play for almost any event--even the dreaded foot-and-mouth outbreak in Europe. The disease has sent hog prices soaring, and that's good news for Smithfield Foods (SFD ), says Dennison Veru, president of Palisades Capital Management, who has been buying shares. Smithfield is the world's largest hog producer and pork packer, and in the U.S., it is the top pork processor. Smithfield's stock, trading at 23 in October, has since kicked up to 32.
"Foot-and-mouth could lead to huge increases in demand for U.S. pork in countries normally supplied by Europe," says John McMillin of Prudential Securities. He says hog prices jumped from an average of $40 a hundredweight in February to $47 in March.
Denmark, where Japan buys 31% of its supplies, could get hit next, warns McMillin. If Danish pork gets banned, "it would create a huge opportunity for Smithfield." Japanese demand could push prices of pork from the U.S. up to $60 per hundredweight. In addition, says David Nelson of CS First Boston, "the Dutch government believes it has found evidence of the disease." That means there's risk of further spread on the Continent, he says.
All this suggests that Smithfield, which raises 3 million hogs per quarter, will see "mighty big numbers," says McMillin. So he has raised Smithfield's fourth-quarter earnings estimate from 60 cents a share to 75 cents, upped his 2001 number from $2.89 to $3.04, and, for 2002, from $3.10 to $3.25.
By Gene G. Marcial