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.

Smithfield Foods, Inc. (SFD) Could Be Worth Much More

Smithfield Foods, Inc. (NYSE:SFD) has received a lot of attention from the investment community with its recent buyout offer from the Hong Kong-based holding company Shuanghui International. The Chinese company offered to acquire Smithfield Foods, Inc. (NYSE:SFD) at around $34 per share, with the total transaction value of $7.1 billion including Smithfield’s debt.

Smithfield Foods, Inc. (NYSE:SFD)

Interestingly, in the middle of June, activist investment fund Starboard Value, the owner of a 5.7% stake in the company, wrote a letter to Smithfield’s board of directors suggesting that the company could be worth much more than Shuanghui’s buyout offering price.

Smithfield appears quite undervalued

In the letter, Starboard announced that it became Smithfield Foods, Inc. (NYSE:SFD)’s shareholder in March, two months before Shuanghui’s merger offer. It believes that Smithfield is worth much more than $34 per share, based on its sum-of-parts valuation. Smithfield operates in three main business segments: Hog production, international and pork. Starboard agrees with Smithfield’s management that hog production “was one of the most valuable assets within the company,” with around 851,000 sows producing 16 million hog annually.

The valuation of the hog-production segment was based on the asset-value basis due to the high volatility of hog-farming profitability, which is caused by the fluctuations in feed inputs and hog prices. Thus, in order to value the hog- production business, Starboard took into account the value of sows at market prices, unborn pigs, live hog inventory and the land and production facility values. With the per-sow space estimates of around $1,100 to $1,600, hog production could be worth around $1.9 billion to $2.3 billion.

For the international segment, what makes Starboard excited is Smithfield Foods, Inc. (NYSE:SFD)’s operations in Poland and Romania. With the market-leading position, Smithfield’s Polish operation might have a premium valuation at 6.5 to 7.5 times its earnings before interest, taxes, depreciation and amortization (EBITDA), including 25% of sales from the more volatile hog-production business.

In the Romanian market, Smithfield also enjoyed being the market leader, with around 30% market share. However, the hog-production business accounted for a greater percentage of sales than in the Polish market, at around 40% of the total sales. Consequently, it should have a lower valuation of 5.5 to 6.5 times its EBITDA.

Consequently, while the Polish operation was valued at $586 to $713 million, the Romanian operation might be worth around $358 to $455 million. Including a 37% stake in Campofrio Food and the Mexican joint-venture stake, the value of the international segment was around $1.3 billion to $1.5 billion.

Last but not least, the pork segment, the biggest revenue and EBITDA contributor for Smithfield Foods, Inc. (NYSE:SFD), could be seen as the biggest pork-processing business globally. In the period of 2007 to 2012, the segment’s EBITDA climbed from $345 million to $752 million, with the EBITDA margin fluctuating in the range of 4.3% to 8.6%.

Interestingly, Starboard pointed out that Shuanghui’s $34 per-share offer would undervalue the Smithfield Foods, Inc. (NYSE:SFD)’s pork business after deducting the value of the hog- production segment and the international segment. Starboard calculated that the implied pork business’ EBITDA multiple would only be 4.7 to 5.8, a much lower valuation than the company’s peers including Hillshire Brands Co (NYSE:HSH) and Hormel Foods Corporation (NYSE:HRL).

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.