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Smithfield Foods (NYSE: SFD ) lit up Wall Street with record quarterly earnings boosted by strong demand for pork. In spite of high raw material costs, the company managed to top Wall Street estimates. But how long can the company report such consistent performances?
A quick look at the numbers
Smithfield reported record results for the fifth consecutive quarter, with its bottom line surging 7.6% to $82.1 million. Sales increased 7% to $3.1 billion, which led to a 25% increase in operating profits.
Strong global demand for pork fueled the rise in revenues. Lower debt helped the company trim its interest expense by $20.5 million.
High costs of corn are rippling through companies connected to the livestock industry, and Smithfield was no exception. Corn prices haven't retreated much from all-time highs set in June. Despite the company reporting higher sales, margins have shrunk as costs rose faster than market prices for fresh pork. Even companies like Tyson Foods, (NYSE: TSN ) , Seaboard Foods (AMEX: SEB ) , and Sanderson Farms (Nasdaq: SAFM ) are facing the challenges of crippling feed costs.
However, Smithfield managed to increase its operating profit by hedging against fast-rising corn prices. While competitors like Pilgrim's Pride (NYSE: PPC ) and Hormel Foods (NYSE: HRL ) are struggling to show positive figures on their balance sheets, Smithfield has protected itself in the relative near term.
With a decrease in corn supply, corn prices are expected to remain high in the near future. If feed costs don't ease, Smithfield could eventually bear the brunt of high corn prices. Smithfield could be facing pressures of sustained high feed costs and could face losses once prices of livestock fall on a seasonal basis. That could be a double whammy.
Foolish bottom line
Smithfield has hedged itself for fiscal 2012 against rises in corn prices. So I believe the company will continue to perform well in the near future. However, intense competition from other established players and the cyclical nature of Smithfield's operations can affect its future growth prospects and profitability. I believe, for fiscal year 2012, the stock is worth watching, but long-term investors should remain cautious.
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