"Mmmm ... bacon." -- Homer Simpson
While Valentine's Day is traditionally celebrated with chocolates, champagne, and other romantic edibles, shareholders of Smithfield Foods (NYSE:SFD) might be tempted to toss in a little bacon or a few pork chops. After all, since this pork and beef producer preannounced very strong earnings for the third quarter, some might be tempted to send the company a love note or two.
On the backs of higher hog prices, better grain prices, and strong export demand for pork, the company announced that it expects to report earnings of $0.86 to $0.87 per share for the quarter. That number is well above the Wall Street guesstimate of $0.61 and more than doubles the year-ago tally of $0.38 per share.
As the No. 1 hog producer in the world (and the No. 5 beef producer in the country), there is no doubt that Smithfield is highly dependent upon the market prices for its finished meat products (to say nothing of the prices of inputs such as grain). Hog prices have more than doubled from their lows in 2002 and were up almost 50% from the same time last year, helping to fuel the company's profit growth.
While some of this may be due to fad diets such as Atkins, there are other factors at work as well. With concerns over mad-cow disease affecting beef exports, pork has become a more desirable meat in many parts of the world. And while Atkins will no doubt fade away, Americans have long eaten pork and will almost certainly continue to do so. What's more, as people become wealthier, they tend to eat more meat -- thus, it's reasonable to think that Smithfield will continue to benefit from a rising global demand for meat products like pork.
We at The Motley Fool have given a lot of attention to food stocks over the past year. In our "Carnivore's Ball" of meat producers, we've mentioned companies such as Tyson Foods (NYSE:TSN), Hormel Foods (NYSE:HRL), and even smaller companies such as Sanderson Farms (NASDAQ:SAFM).
As has been mentioned in the past, Smithfield has some operating characteristics that make it a little less desirable to some Fools. Smithfield's margins are lower than those of other food processors, the return on capital is rather modest, and the company carries a hefty chunk of debt. All that said, this company is growing faster than many of its peers are, and we all know that Wall Street likes to reward short-term growth.
While Fools looking for better margins and return on equity should check out Sanderson Farms or Hormel, investors looking for a purer play on pig profits should spend a moment or two rooting around Smithfield's financials.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
