Smithfield Profit Down, Outlook Sunnier

Meat company Smithfield Foods Inc. (SFD) Thursday said quarterly earnings fell 11 percent, hurt by lower results in pork processing and an international operating loss, but shares rose as the company forecast better results later in the year.

"August looks like it is going to be a good month for us," Smithfield President Larry Pope told Wall Street analysts on a conference call. "As we look into the fall season, hog prices have held up quite a bit stronger than others have predicted."

Smithfield, the world's largest hog and pork producer, also said it will end hog slaughter and fresh pork production at its Smithfield, Va., plant at the end of October. The plant will be used to make higher-margin pork and processed meats, with the conversion resulting in a second quarter charge of $8 to $10 million.

The company reported earnings for the first quarter ended July 31 of $49 million, or 44 cents per share, compared with $54.9 million, or 49 cents per share, a year ago. The results matched the average expectation of Wall Street analysts, according to Reuters Estimates.

"I think that there is a fairly positive outlook," said Christine McCracken, analyst with Midwest Research. "It is really tied to improvement in pork demand domestically, ongoing strength in export markets, and the fact that they have locked in feed costs near term."

Rival meat company Hormel Foods Corp. (HRL) reported a 9 percent drop in third quarter results Thursday, due to a year-ago one-time gain, but it said sales rose on strong demand for turkey and refrigerated foods.

Company-wide revenue rose 11 percent to $2.96 billion.

Hog production was the big contributor to Smithfield's results. Meanwhile, the company's beef segment continued to struggle amid weak pricing and closed export markets such as Japan after the United States reported mad cow disease in an animal in late 2003.

Hog production operating earnings rose to $115 million, up 15 percent from a year ago. Hog prices on average were lower during the quarter than last year, but lower grain prices reduced the cost to raise them, the company said.

Year-ago results in the unit were reduced by costs related to hedging and forward purchasing arrangements in hog and grain futures.

Smithfield's international segment posted an operating loss of $5.2 million, largely related to a temporary plant closing in Poland and competitive pricing pressures in France.

Smithfield, the fifth-largest U.S. beef producer, posted an operating profit in beef of $7.3 million, up from $1.8 million a year ago, boosted by results from a cattle feeding joint venture. Last year's results were hampered by costs associated with Smithfield's Showcase Foods unit, which was closed.

The Virginia hog plant that is ceasing slaughter and fresh pork operations will be converted to produce higher-margin fresh pork products and processed meats in 2006. Hog processing will be shifted to two other plants.

"This ... decision to discontinue hog processing at the Smithfield plant is driven largely by hog availability," Joseph W. Luter IV, president of Smithfield's packing unit and a son of the CEO, said in a statement.

"This lack of hog supply is the direct result of the moratorium on hog farms in North Carolina and the de facto moratorium in Virginia," he said.

Shares of Smithfield rose 56 cents to $27.08 on the New York Stock Exchange (search). Hormel shares were off 18 cents at $30.17 also on the NYSE.