Smithfield Foods Yields Positive Outlook

Goldman Sachs has published a report on Smithfield Foods, Inc. SFD after the company reported a strong quarter that yields a more positive long-term outlook. In the report, Goldman writes "We are adjusting estimates to reflect changes in both the near-term and “normalized” long-term outlook. In the very near-term, we are raising FY2011 by $0.15 to $2.15 and lowering FY2012 by -$0.10 to $1.75, reflecting: (1) the +$0.24 beat, (2) an updated outlook for hog prices to climb +15% in CY2011 down from our +20% prior view as we now expect an incremental +50 bp supply improvement industry-wide from SFD's productivity efforts, (3) a more onerous feed outlook than when we last benchmarked, and (4) better Pork margins. By division, we now expect Hog Production profits will be modestly in the red next year while Pork profits should improve +2%. Over the long-term, we are raising our “normalized” earnings forecasts (2013 and beyond; 2013E EPS moves to $2.05 from $1.50) to reflect Pork processing margins sustained at above-historic-average levels. We note we have already made this adjustment for SFD's peers. We now see normalized EBITDA in the $850-900 mn range (from $500-550 mn) and ROIC around 7.5%." Goldman Sachs maintains its Buy rating and $22 price target. Smithfield Foods, Inc. closed yesterday at $19.70.