Jan 10 Fitch Ratings views Smithfield Foods, Inc.'s (SFD:
Smithfield; not rated) goal of further expanding into branded packaged meats,
with vertical integration in hog production, as strategically sound but
significant further growth without acquisitions may be challenging. We do not
believe a breakup of the company is likely given this strategy and expect
volatile operating earnings in commodity operations to overshadow the firm's
progress in higher-margin packaged meats.
Vertical integration in hog production provides Smithfield control over its
supply, providing traceability and sourcing to manage ongoing cost volatility in
its packaged meats operation. However, cash flow volatility in hog production
and fresh pork may limit Smithfield's ability to investment meaningfully in
research and development, marketing, and advertising. Such spending is necessary
to compete effectively in packaged foods, particularly on a national scale.
We withdrew our 'BB' issuer default rating on Smithfield on Oct. 31, 2012 but
continue to rate Tyson Foods, Inc. (TSN: Tyson; rated 'BBB' with a Stable Rating
Outlook) and Hillshire Brands Co. (HSH: Hillshire; rated 'BBB' with a Stable
Rating Outlook). Both Tyson, which is one of the world's largest meat protein
companies and a major competitor of Smithfield, and Hillshire are focused on
investing and growing in branded packaged meats and value-added meat-based
Tyson is targeting sales growth of 6%-8%, inclusive of bolt-on acquisitions, in
value-added poultry and prepared foods over the next three years. During fiscal
2012, approximately $15.0 billion of Tyson's $33.3 billion of revenue was from
value-added poultry and prepared foods products but the firm also sells a
meaningful amount of value-added beef and pork.
Hillshire generated $4.1 billion of total revenue in fiscal 2012, with retail
sales of packaged meats products, under national brands such as Hillshire Farm,
Jimmy Dean, and Ball Park, representing the bulk of those sales. The company's
corporate top-line growth target is 4%-5% annually (including 2%-3% volume
growth) by fiscal 2015.
Smithfield's packaged meats business, which consists mainly of regional brands,
has grown 17% since 2010 to $6 billion of annual sales for fiscal 2012, or 46%
of the firm's $13.1 billion total. Normalized operating margins for packaged
meats range from 5%-8%, based on the 2.7 billion pounds of product sold in 2012,
or $0.12-$0.17 per pound and can be twice as high as those in fresh pork. We
view margin pressure as a risk for the packaged meats firms in calendar 2013
given still-elevated corn prices and upward pressure on the cost of livestock.
For additional information see:
"2013 Outlook: U.S. Commodity Protein, Produce, and Dairy: Pricing and
Efficiency Becomes Paramount as Additional Divestitures/Spin-Offs are Limited,"
Dec. 13, 2012.
"2013 Outlook: U.S. Packaged Foods - Prioritizing Acquisition Integration and
Debt Reduction, but Hunger for Growth Remains," Dec. 13, 2012.