Smithfield Jumps After Forecasting Growth in Packaged Meats

Smithfield Foods Inc., the world’s largest hog producer, jumped the most in more than two years after reporting better-than-estimated fiscal third-quarter earnings and forecasting growth at its U.S. packaged-meat unit.

Smithfield rose 11 percent to $24.68 at the close in New York, the biggest gain since Dec. 9, 2010.

“Our performance in the third quarter underscores success we are continuing to see in packaged meats,” Chief Executive Officer C. Larry Pope said today on a conference call with analysts. “Looking forward, we anticipate that our packaged-meats business will continue to deliver consistent growth with increased market share and broader distribution of our core brands.”

Net income increased to 58 cents a share in the quarter ended Jan. 27 from 49 cents a year earlier, the Smithfield, Virginia-based company said today in a statement. That topped the 50-cent average of 13 analysts’ estimates compiled by Bloomberg. Sales rose 3 percent to $3.58 billion as volume increased in its unit that makes bacon, sausage and ham steaks and exports to countries other than China.

Packaged meat volumes will increase at least 2 percent to 3 percent in fiscal 2013 and Smithfield expects the trend to continue into fiscal 2014, Pope said.

Production Losses

Earnings from the fresh-pork unit fell 31 percent and Smithfield’s hog-production business posted a loss in the quarter of $15 a head, the company said. Smithfield said its hog unit will see losses per head in the “mid single digit range” for the full year.

“The big issue is stemming the loss in hog farms,” Tim Ramey, a Lake Oswego, Oregon-based analyst for D.A. Davidson & Co., who rates the shares a buy, said today in a telephone interview. Hog farms will return to profitability later this calendar year partly because of lower corn prices, he said.

The company’s hog farms give it a competitive advantage and selling them would be a “big mistake,” Pope said on the analyst call. Owning hog farms enables the company to respond more precisely to customer demands.

In the U.S., consumers are increasingly asking that pregnant sows are housed in group pens rather than by themselves in so-called gestation crates, and countries such as China and Russia are demanding pork free of a feed supplement called ractopamine.

Gestation Crates

Smithfield began shifting its sows to group housing in 2007 and has said it will complete the process in 2017 for company-owned U.S. farms. The company has two operations in the eastern U.S. that are ractopamine-free, Pope said.

The shares also are rising because Smithfield said some customers are paying more for pork produced from hogs born to sows housed in pens, Heather Jones, a Richmond, Virginia-based analyst for BB&T Capital Markets, who rates the shares a buy, said in an e-mail today.

As part of its growth, Smithfield is looking for acquisitions in the $50 million to $200 million range that are easy to integrate, Pope said. He also said the company will boost capital expenditures to $300 million to $350 million annually to improve costs and its plants. Capital spending was $293 million in the fiscal year through April 2012, according to data compiled by Bloomberg.

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