Smithfield Foods, Inc. (SFD): Will Patience With This Pork Producer Payoff?

Tyson Foods, Inc. (NYSE:TSN)’s market price looks pretty close to fair value. With estimated annual sales around $34 billion, cash earnings of $948 million at a normalized 2.79% margin, the company’s reasonable intrinsic value looks around $25 a share based on a 9.5x multiple. On a historical basis, the company has traded in the 9x to 10x multiple range with around a 2.30% margin in the mid-2000’s.

The company’s lower multiple, relative to Smithfield’s, probably relates to its size. Tyson Foods, Inc. (NYSE:TSN)’s scale and diversification may be thought to limit an ability to leverage good times into significantly above average profits.

Hormel Foods Corporation (NYSE:HRL) started as a processor of meat and food products, but has transitioned into more of a manufacturer and distributor of branded consumer items rather than commodity fresh meats. The company’s consumer product emphasis has allowed it to maintain amazingly consistent gross margins. Besides a few outlier quarters with relatively minor up and down variances, Hormel’s quarterly gross margins have been in the 16% to 16.7% range since 2009.

The market has rewarded Hormel Foods Corporation (NYSE:HRL)’s consistency with an optimistically priced stock. Based on estimated annual sales of around $8.6 billion, cash earnings of $522 million at a 6.1% margin, and a market multiple of between 16x and 18x, the company’s fair intrinsic value looks to be around $32 to $35 per share. In comparison, the company tended to trade with a 15x to 16x multiple range in the past and have around a 6.6% cash earnings margin.

The market premium given to Hormel Foods Corporation (NYSE:HRL)’s consumer brand strategy has not gone unnoticed. Both Smithfield and Tyson are taking similar steps to increase their offering of value-added consumer products.

Conclusion

Smithfield Foods, Inc. (NYSE:SFD) might be facing some serious near-term difficulties. A possible over supply of product, weakened demand, and higher feed cost will likely pressure profits. But, the company’s future could be a lot brighter if corn prices retreat and demand steadies. Though it might take some patience, this hog producer might serve up further share gains when things start turning its way.

The article Will Patience With This Pork Producer Payoff? originally appeared on Fool.com and is written by Bob Chandler.

Bob Chandler has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Bob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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