Smithfield Foods' Shanghai Surprise

Sometimes, beating analysts' estimates by $0.05 isn't what captures the market's attention during an earnings conference call. That was certainly the case for Smithfield Foods (NYSE: SFD  ) , the world's largest pork processor and hog producer.

Beefing up growth potential with China
In last week's call, management settled rumors that had been floating around that the company was talking to Chinese trading company COFCO. Smithfield's team speculated that China's hog market could be slashed by a whopping 20% due to disease. Given the country's problems, China could become an enormous market for Smithfield to tap.

After the conference call, Smithfield announced an official agreement with an "undisclosed" trading company to deliver 60 million pounds of Paylean-free pork to China through year-end. Sixty million pounds sure sounds like a lot of meat, but compared to the meat processor's typical yearly production, the number is fairly modest. However, management did indicate that more agreements could develop a long-term relationship with the unknown company.

That's a lot of hog ... or not?
So just how important is the 60-million-pound contract to Smithfield? Well, in 2006, the company sold 3.1 billion pounds of fresh pork products. The contract represents just 1.9% of that. Sixty million pounds isn't so big after all. And considering that Smithfield sold another 2.9 billion pounds of processed pork during the year, the Chinese deal's impact on profits doesn't look substantial ... yet.

The deal might be modest now, but it indicates that Smithfield has a foot in the doorway of the hugely important Chinese market. The stock price is still where it was before the news -- could the company's new access to China provide a bargain opportunity for investors? 

Is Smithfield's price tag meatier than its rivals?
Comparing Smithfield and its competitors, it's selling at a much lower valuation. If the company will be able to expand into China in a big way, the growth could be selling for a discount at the current price.  


 Forward P/E



 Smithfield Foods




 Tyson Foods (NYSE:TSN)




 Hormel (NYSE:HRL)




 Sadia S.A. (NYSE:SDA)




 Perdigao S.A. (NYSE:PDA)




Data from Yahoo! Finance

There is the possibility China may not become a significant importer from the protein king, and you wouldn't -- and shouldn't -- base your valuation solely on a chance that the country will drive significant growth for Smithfield. However, this Fool believes China's bursting population is not to be ignored. Its industrialization has farmers dropping their pitchforks and abandoning their livestock for big city manufacturing jobs. And while the country has a large agriculture market, a lack of farmers cannot keep up with the demand of a rapidly growing population. As a result, China has begun importing many of these goods.

Is this stock tasty enough for investors?
Smithfield still has a debt burden to eat up, and it needs to work on expanding its margins, as its profit margin is well below the already-lean industry average. But the company is headed in the right direction and slowly improving operations. Wall Street looks pretty upbeat for the company; nine out of 14 analysts recommend investors beef up their portfolios with the company. And the Motley Fool CAPS community seems to agree, offering the company a four- out of five-star rating.

The company is selling at a discount, and its future growth story is selling for a great value. Whether the share price will reach a higher level or not is of course unknown, but improvement seems promising in the future and if the company can effectively tap the newly opened Chinese market, I think I'd be filling up my plate with this stock.

Other meaty Foolishness:

Sadia is a recomendation of Motley Fool Hidden Gems. A 30-day free trial gives you full access to see what everyone is clucking about.

Fool contributor Markos Kaminis has no ownership interest in any of the companies discussed here, but you might find a tasty pork souvlaki recipe at his financial markets blog, Wall Street Greek. The Fool has a mustard-hot disclosure policy.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 536064, ~/Articles/ArticleHandler.aspx, 10/26/2016 3:08:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,192.09 22.82 0.13%
S&P 500 2,139.36 -3.80 -0.18%
NASD 5,247.70 -35.70 -0.68%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 2:53 PM
HRL $38.13 Up +0.10 +0.25%
Hormel Foods CAPS Rating: ***
PDA $46.09 Down +0.00 +0.00%
Perdigao CAPS Rating: ***
SDA.DL $0.00 Down +0.00 +0.00%
Sadia CAPS Rating: *****
SFD.DL2 $0.00 Down +0.00 +0.00%
Smithfield Foods,… CAPS Rating: **
TSN $68.70 Down -0.34 -0.49%
Tyson Foods CAPS Rating: ****