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Bacon Shortage? This Board Member Is Ready

Smithfield Foods, Inc. (NYSE:SFD), the largest pork processor in the world according to the company, is currently down 17% on the year, with even speculation of an impending shortage of pork products next year (as higher grain prices dissuade farmers from raising hogs and other livestock) failing to boost the stock’s price. Apparently David Nelson, a Board member at the company, believed that the stock price had fallen far enough. According to SEC filings, Nelson purchased 5,000 shares on September 28th at an average price of $19.56, bringing the total number of shares he directly owns to 35,000. He had previously bought 5,000 shares in the middle of June at an average price of $19.99, so he has recently put about $200,000 into the company at about the current stock price (about $20 even at the time of this writing). Studies on insider trading show that statistically they tend to be bullish signs, so we track stocks seeing insider buying activity as ideas to be investigated further.


Hedge funds, however, generally avoided Smithfield Foods, Inc. during the second quarter (at least compared to other stocks). The two largest hedge fund positions in the stock at the end of June according to our database of 13F filings belonged to Citadel Investment Group and Renaissance Technologies, at about $20 million each. Citadel, managed by billionaire Ken Griffin, increased its stake to a total of 1.1 million shares (find other stocks Citadel Investment Group owns). Renaissance, whose success since inception has made founder Jim Simons a billionaire, initiated a position of about 830,000 shares during the second quarter (see more stocks that Renaissance liked during the second quarter).

Revenue in Smithfield’s first fiscal quarter, which ended in July, was about flat compared to the same period in 2011. Due to rising costs, net income fell from $82 million to $62 million; the company’s share count was down slightly as well, but earnings per share still dropped 18%. The drop in the share price and the recent trends in the business have left Smithfield Foods, Inc. trading at 9 times trailing earnings. Wall Street analysts expect the current year’s earnings per share to come in 29% lower than in the last year; this would require the company to do even worse than it did in the first quarter. Smithfield also plans to buy back stock, initiating a new repurchase program this past June, making that 29% target- which would leave the current price at 11 times current year earnings, a reasonable price- seemingly easy to beat.

The closest peers for Smithfield are meat products-focused Hormel Foods Corporation (NYSE:HRL) and Tyson Foods, Inc. (NYSE:TSN), processed foods provider ConAgra Foods, Inc. (NYSE:CAG), and chicken products company Pilgrim’s Pride Corporation (NYSE:PPC). ConAgra Foods and Hormel showed moderate increases in revenue last quarter compared to the same period a year ago, and both companies converted this rise into an increase in earnings as well. They trade at a substantial premium to Smithfield: Hormel, the cheaper one, trades at 16 times trailing earnings. Their better recent performance and good dividend yields (ConAgra’s is 3.6%) are attractive, possibly even enough to overcome their higher pricing. Pilgrim’s Pride is unprofitable on a trailing basis, due to a poor second half of 2011, and trades at 14 times forward earnings estimates. We like that it seems to be rebounding, but doesn’t seem to be as good a buy. Tyson is the closest to joining Smithfield as a potential value stock, at trailing and forward P/Es of 12 and 11, respectively. However, a sharp rise in interest expenses with little accompanying change in revenue drove its earnings down in its most recent quarter versus last year.

We like that Smithfield is seeing insider buying, and even with what seem like fairly pessimistic analyst expectations the stock seems priced about fairly compared to better-performing meat products companies with higher earnings multiples. It could be a good stock to watch.

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