Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Does Smithfield Foods, Inc. (SFD) Have a Good Deal?

Page 1 of 2

Recently, Smithfield Foods, Inc. (NYSE:SFD) has received a merger offer of $34 per share from the Hong Kong-based holding company, Shuanghui International Holdings. At $34 per share, the deal is valued at as much as $7.1 billion, including Smithfield’s net debt. Since the beginning of the year, Smithfield has advanced significantly, by more than 52.4%.

Let’s take a closer look to see whether or not Smithfield Foods, Inc. (NYSE:SFD) is fairly valued at the acquisition price.

Smithfield Foods, Inc. (NYSE:SFD)

Business snapshot

Smithfield is the producer of a wide range of fresh meat and packaged meat products, operating in four main business segments: Pork, Hog Production, International and Corporate. Most of its revenue, $11 billion, or 70.5% of the total revenue, was generated from the pork segment while the hog production produced more than $3 billion in 2012 revenue. The pork segment was also the biggest profit contributor, with $623.7 million in operating profit. Hog production ranked second, with $166.1 million in income while the International segment generated only $42.8 million in operating profit in 2012.

In the past ten years, Smithfield has managed to grow its revenue from $7.9 billion in 2003 to more than $13 billion in 2012. Net income has grown from $26 million to $361 million during the same period. However, Smithfield Foods, Inc. (NYSE:SFD) produced losses of $190 million in 2009 and  $101 million in 2010, respectively. The losses were due to much higher cost of goods sold and higher interest expense.

Smithfield Foods, Inc. (NYSE:SFD) seems to have quite a strong balance sheet. As of January 2013, it had more than $3.2 billion in equity, $138.6 million in cash and more than $1.85 billion in long-term debt and capital lease obligations. The majority of its assets, $2.39 billion, were inventories while the goodwill and intangible assets were more than $1.18 billion. Consequently, its tangible book value was more than $2 billion. At $34 per share, Smithfield Foods, Inc. (NYSE:SFD) is worth more than $4.7 billion on the market. The offering price values Smithfield Foods at nearly 8.7 times Enterprise Value over Earnings Before Interest, Taxes, Dividends and Amortization (EV/EBITDA).

Hormel Foods is really a dividend stock

Smithfield’s valuation is lower than Hormel Foods Corporation (NYSE:HRL), but higher than Tyson Foods, Inc. (NYSE:TSN).

Hormel Foods is trading nearly $39 per share, with the total market cap of $10.3 billion. The market values Hormel Foods Corporation (NYSE:HRL) at as high as 12.5 times EV/EBITDA. Hormel Foods has just recently reported its second quarter earnings results. Its revenue rose by 6.9% to more than $2.15 billion. However, its earnings declined a bit, from $127.9 million in the second quarter last year to $125.5 million in the second quarter this year. For the full year,

Hormel Foods Corporation (NYSE:HRL) maintained its full-year earnings per share (EPS) estimate in the range of $1.93 to $2.03 per share. What might attract income investors to Hormel Foods is its consistent dividend payment in the past ten years. Since 2003, its dividend has increased from $0.21 per share to $0.60 per share. In the second quarter earnings announcement, Hormel also announced that it paid quarterly dividend of $0.68 per share.

Page 1 of 2