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Smithfield Foods (NYSE: SFD ) , the nation's biggest pork producer by volume, recently announced disappointing fourth-quarter numbers. The company saw its earnings slide because of lower-than-expected sales and an oversupply of hogs. Management defended its numbers by saying that the meat processing market is one in which volatility is expected. Let's take a deeper look to see whether the weaknesses lie in the industry or are specific to the company.
Although revenue for the quarter came in 3% higher than the year-ago period, net income fell a sharp 19% to $79.5 million. After adjusting for special items, the company earned $0.43 per share, which fell short of analyst expectations of $0.53 per share. These numbers pale in comparison to competitor Hormel Foods' (NYSE: HRL ) sharp 17% hike in net income during its quarter ended in April.
Compared to the rest of the industry, Smithfield slaughtered more pigs this quarter, thus increasing supply and reducing wholesale prices. Despite this decrease, retailers were unable to offer lower prices due to rising selling costs that ultimately hurt sales. As a result, the company's operating margin in its biggest segment – pork -- fell drastically to 1% as compared to 10% last year.
Light at the end of the tunnel?
On the bright side, Smithfield witnessed a robust 13% growth in its export shipments, as the Chinese market for its products improved. Moreover, the company is cutting back production to avoid over-supply in the market.
At the same time, Smithfield is taking several steps to improve its position. It plans to undertake marketing initiatives in its packaged meat segment, which seems to offer better margins. The company has already launched new brands such as lower-sodium Armour pepperoni to attract more health-conscious customers.
The Foolish bottom line
These factors, coupled with a better-looking economy with increasing customer demand and falling gas prices, are likely to work in favor of the company in future. As of now, I'd prefer to keep an eye on Smithfield. Add Smithfield Foods to your free Watchlist to stay updated on this company. Click here!
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