Smithfield Foods (SFD) China Play Gaining Traction in Mainstream Press

We were discussing this Smithfield Food (SFD) angle on China pork in August; looks like Barron's has picked up on this story now about 6 weeks later, and its making the rounds in more and more financial outlets throughout the internet as well. The stock dipped pretty severely in past week (down to its 200 day moving average) but has bounced back smartly and there is some nice insider buying going on as well in the name. Might have to consider this stock for the portfolio - I'd like to see a followup large order from China however. Also the one fly in the oinkment.... err ointment, is the squeeze on margins from feedstock (i.e. the stuff to feed them pigs is going up on quite a savage trajectory)

For earlier blog entries on Smithfield Foods (SFD) click here.

Here is the Barron's article this weekend re: SFD and some highlights below:

• Consider what's happening in China: As the world's largest pork-consuming country celebrates the year of the pig, it ironically is suffering an acute pork shortage. A vicious outbreak of Porcine reproductive and respiratory syndrome, or Blue Ear disease, has infected 290,000 pigs and would wipe out 20% of the pig population. Pork prices have jumped 70% in the past year, nudging Chinese inflation to a decade high. Vietnam and Myanmar also reported outbreaks of the disease.
• Into the fray comes Smithfield, which agreed in late August to supply 60 million pounds of pork to a Chinese distributor. While the agreement is to supply pork through December 2007, it could lead to additional purchases.
• or one thing, the Chinese pork shortage won't ease soon: It takes about 18 months to rear a sow and produce piglets, and the government's disease control and vaccinations will take time. Meanwhile, the government is under mounting pressure to keep food inflation in check and stave off social unrest.
• Future pork orders may or may not come to Smithfield's, but bulls like Smithfield's odds and its international clout. "Regardless of who China places future orders with, it'll still take protein off the market, which will drive up prices and benefit pork producers," says Ted Baszler, who manages the Heartland Select Value Fund (HRSVX) and is a stockholder.
• Smithfield, which raises 14.5 million hogs a year and processes 27 million, was hurt recently by a circo-virus outbreak, as well as swine fever at some of its Romanian hog farms. China, understandably, also wants to protect its domestic industry, and has balked at U.S. pork containing the growth enhancer ractopamine.
• At about 31.50, Smithfield has pulled back 12% from its mid-summer peak and is trading at 12.6 times forward earnings. Shares have been stagnant in the past two years, chiefly as worries persist about rising grain and feed costs.
• As Smithfield beefs up its commodity offerings with higher-margin products such as pre-cooked ham, bacon and ribs, it could emerge stronger from the current cycle trough. Baszler sees operating margins, now at 3%, increasing to 5% or 6% by 2010.

No position