Analysts: Smithfield will bounce back from stock slump

What goes down often comes up. Then it could go down again. That reflects the roller-coaster ride of the shares of Smithfield Foods Inc.

From May 30 to July 3, Smithfield's shares sank from $31.78 to $16.88 on the New York Stock Exchange - a 47 percent drop. They plummeted to their lowest level in more than five years.

This week, the news was better - mostly.

By the close of trading Thursday, Smithfield's stock was up to $19.40 - a 15 percent rise from the end of the previous week, yet still down significantly from earlier this year.

The gains didn't last through the week, however. On Friday, Smithfield's shares fell 5 percent to $18.47.

Chalk up the company's jittery stock pattern to a mixture of escalating grain and fuel costs, Smithfield's cash needs, the Midwest's improved weather outlook and a thunderbolt of larger worries rumbling through the nation's markets.

Analysts, however, say the outlook for the Smithfield-based company, the world's largest hog producer and processor, remains sturdy in the long haul.

"The environment for anybody in the meat processing business this year has not been great," said John Urbanchuk, director of LECG LLC, a global consulting firm outside Philadelphia.

Corn prices soared in the first half of the year, thanks in large part to federal ethanol set-asides and recent flooding in the Midwest. Don't underestimate the effects of skyrocketing fuel prices, either, Urbanchuk said.

"Every morning when I go to work, I pass these 18-wheel trucks that are carrying live hogs" to a Pennsylvania meat-packing plant, he said. "After they finish the product, they put it back into the trucks and take it to the grocery stores. That's a more significant impact than corn and soybean" prices.

Smithfield's financial reputation sank a bit lower last week with a triple-whammy announcement, which some analysts interpreted as confirmation of serious cash needs:

- Smithfield said it was selling nearly 5 percent of its common stock to COFCO Ltd., China's largest national agricultural trading and processing company.

- Smithfield said it would offer $350 million of convertible senior notes due in 2013.

- The company said it plans to merge its Groupe Smithfield European operations with Campofrio Alimentacion SA of Spain.

Not everyone looked at the developments unfavorably.

The COFCO transaction "was viewed, at least to people I talked with, in a couple of ways," said Chris Hurt, an agricultural economist at Purdue University in Indiana. "Some people said: Smithfield needs cash. The rest of us viewed it as: China needs pork."

What helped improve Smithfield's standing this week, Hurt said, was the recent moderation in corn prices.

They increased from $5.50 a bushel at the end of May to $7 at the end of last month, Hurt said, but have since gone down to about $6.50.

And that, he said, is linked to the improved weather in the Midwest. There's been steady rain - "but not 10 inches in one day" - and temperatures below the 90s. "A good bit of corn land did get replanted," Hurt said.

Smithfield's stock tumble Friday was part of a marketwide tailspin, triggered largely by concern about the condition of Freddie Mac and Fannie Mae, the federal mortgage finance agencies.

Smithfield's long-range prospects remain strong, Hurt and Urbanchuk said.

"They're generally well-managed and financially sound," Urbanchuk said. "If you have that, you're in a very, very good position to weather the vagaries of the marketplace."

Philip Walzer, (757) 222-3864, phil.walzer@pilotonline.com