Tuesday, August 26, 2008

Smithfield Foods (SFD), Sanderson Farms (SAFM) Continue to Suffer

I've been reporting on these food producers since fund inception to give readers an idea of the coming inflation and adverse effects of the boondoggle that is ethanol. What I do find strange is how bad news from this group is coming as a "surprise" anymore - it has been increasingly bad all year and anyone who is paying attention could of saw this coming a long time ago. We are now at the point the chicken producers, for example, are now shutting down plants, letting go of employees (great for the economy) and trying to limit production since feed costs are through the roof. This will hopefully (for them) lead to higher prices - again great for the economy (aka the consumer)

Both Smithfield Foods (SFD) and Sanderson Farms (SAFM) just reported so let's take a look - as an aside Buffalo Wild Wings (BWLD) fell off the cliff this morning, I assume off the chicken producers results and/or Sanderson Farms CEO comments about casual dining weakness - which again I say "why the surprise?" The American consumer in the lower and middle class is struggling with all the cost of life increases - I continue to be struck that the upper 0.5% who do most of this day to day stock trading, simple do not get it. Even a year later. I did add a bit to BWLD as it fell 8% down to its 200 day moving average of $33, but if it breaks that level, we'll cut back. Two weeks ago these stocks (Panera Bread is another) could do no wrong as the "consumer was back!" and "commodity inflation is dead! input costs will crater! Cramer said so!" - today they get hammered. Nothing changed 2 weeks ago - nothing changed today - just program trading jumping in and out of sectors. This is nothing but a traders market - jump in, scalp a gain, and get back out. No place for investors.
  • Pork producer Smithfield Foods Inc (SFD) and chicken producer Sanderson Farms Inc (SAFM) reported losses on Tuesday as sharply higher feed prices continue to weigh on the U.S. meat industry.
  • Flooding in the U.S. Midwest this spring, combined with strong demand by exporters, livestock producers, and the makers of ethanol, pushed corn prices to record highs this summer.
  • At Smithfield, a loss on hogs overshadowed much improved earnings in pork processing, which were more than double a year earlier due to strong exports. The Smithfield, Virginia-based company reported a loss of $12.6 million, or 9 cents per share for the fiscal first quarter ended July 27, compared with a profit of $54.6 million, or 41 cents, a year earlier. That included $15.9 million, or 12 cents per share, in income from discontinued operations, plus $25.6 million, or 19 cents, in costs and charges. Excluding those one-time items, the loss would have been about 2 cents per share. On that basis Wall Street analysts on average expected a loss of 4 cents per share, according to Reuters Estimates.
  • "This quarter looked good enough, though we believe a recent downdraft in hog prices and calendar 2009 export outlook in the face of a strengthening dollar are the more salient issues," Jonathan Feeney, food analyst at Wachovia Capital Markets, wrote in a research note. (I thought a stronger dollar was a good thing? Oh wait, we said be careful for what you wish for because it will hurt all the companies goosing earnings on weak dollar exports - that's ok Wall Street will figure this out in about 6 months when the earnings reflect this - in the meantime they are too busy high fiving each other over this "great" development because it allows Uncle Ben to keep rates artifically low. Why do we like this? Because it sets up the next great money making scheme/bubble for Wall Street into 2013 or so.)
  • At Smithfield, the hog unit lost $38.8 million, compared with a year-ago profit of $93 million, as hogs, on average, sold for $55.50 per 100 lbs, but cost $61 per 100 lbs to raise. (I like to call this the "airline business model" - you know, sell something for less than it costs - than just wait for the Wall Street computers to rush into your stock, with traders clapping all the way because now you are losing less money then you did 6 months ago - meanwhile selling off stocks who actually make money because that was last year's trade - "profitability" is sooooooo 2007) It called the remainder of 2008 for hogs "unfavorable."
  • For the fiscal third quarter ended July 27, Laurel, Mississippi-based Sanderson Farms, the No. 4 U.S. chicken producer, reported a loss of $3.65 million, or 18 cents per share. That included a charge of $1.7 million, or 9 cents a share, paid to settle litigation. Minus the charge, Sanderson's loss would have been $1.945 million, or 9 cents per share. On that basis, Wall Street analysts expected a loss of 5 cents, according to Reuters Estimates.
  • At Sanderson, in addition to higher feed costs, a slowdown in restaurant and food-service businesses have affected the company as more cash-strapped consumers eat at home. (remember, that is backwards looking - the pundits are screaming to us as gasoline drops 40 cents that consumers will now "be back" - so I'm shocked, just shocked, the stocks are not shrugging off this news as its not forward looking - remember we hit nirvana in 6 months)
  • "Casual dining and food service customers have been affected by a significant decline in restaurant traffic due to weak economic conditions and higher fuel prices," Chief Executive Joe Sanderson said in a statement. (that's in direct conflict to what pundits tell me - so do I listen to someone in the industry or a bunch of traders screaming to buy consumer discretionary because in 6 months everything will be fine? Usually I try to ignore people who live, breathe, and work in an industry because really what do they know compared to traders at a hedge fund desk or "strategists" on financial TV? Remember the game - every trader is trying to jump in front of the next trader trying to guess when the recovery happens so they constantly drive up bad stocks counting on a "recovery" that they have no clue is going to happen, but if enough people do this at once, the flood of dollars can make the stocks ramp - and thats yet again what we saw in July and August - it happens like clockwork every 3 months the past year. Meanwhile companies executing are tossed to the curb - who needs 'em!)
We continue to live in a hear no evil, see no evil environment - people of "high above the median" wealth trade off what they see/feel/live in their lives, and this disconnect between their lifestyles and what is really going on in the "real world" for typical people of modest means - leads to some strange trading decisions and movements. In my opinion this led to the "denial" stage all of summer 2007 and fall 2007 when all these people of means were saying "what slowdown?", "what inflation?" "my personal assistant says prices are not going up that much so why all the whining?". Much like our politicians with their 2-4-6-8 homes, gold plated healthcare and benefits package - the "elite" in the country simply are out of touch for the struggles of the many. I think this wealth chasm only grows wider over the coming years as huge swaths of people who were relying on credit get by the past decade turn increasingly bitter, angry... and desperate. Just my take - and I hope to be wrong. Meanwhile, every time gas drops 40 cents it's time to build a new thesis about how these people who are facing a multitude of challenges, and a lack of credit to finance their old lifestyles will "be back".

[Jun 30: Listen to the Companies, not Government Reports - Brunswick Corp and Smithfield Foods]
[Feb 28: Smithfield Foods Continues to Struggle with Input Costs]
[Nov 12: Tyson Foods Continues to Point to Food Inflation]
[Aug 29, 2007: Inflation in Groceries]

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