United States-Money markets take a second look at meat companies.
UNITED STATES-MONEY MARKETS REVEIW MEAT COMPANIES.
Even in the best of times, analysts say, meat processing is a challenging low-margin, highly leveraged business. But throw in a lingering global recession and the forecast remains stormy for major Tyson Foods competitors Smithfield Foods and beef packer JBS — both facing liquidity concerns.
"Based on our estimates, Smithfield will likely violate its debt covenants in the quarter ending Oct. 31," said Farha Aslam, analyst with Stephens Inc.
Aslam said barring another credit crunch, Smithfield should be able to renegotiate covenants and continue to have adequate liquidity at a higher cost — between $10 million and $15 million more in annual interest expenses.
With that, Stephens lowered its earnings estimates to 87 cents per share from $1.50 for fiscal year 2010. Wall Street’s consensus estimate is that Smithfield will post a 52-cent per share loss in its upcoming fourth quarter ending April 30. For the full year, analysts expect Smithfield will lose $1.31 per share in 2009.
BB&T Capital Markets expects Smithfield will narrowly stay in compliance with its lenders, but also lowered earnings guidance by one-third.
In response to the weaker forecasts, Smithfield on Thursday said it is confident it will remain in covenant compliance.
Smithfield Foods is the nation’s largest pork processor and owns Butterball LLC, with three turkey processing plants in Arkansas — in Huntsville , Ozark and Jonesboro .
Springdale-based Tyson Foods Inc. is a major competitor of Smithfield , ranking second behind the Virgina-based pork giant in marketshare, according to the National Pork Board.
The Stephens pork margin (indicating processing profits) has been negative for seven of the last 10 weeks. There is optimism that the grilling season should help support pork prices and restore profitability for all packers, although not nearly to last year’s record levels, Aslam said.
Pork producers are hoping that domestic sales will ease the pain from sagging exports expected to lag 8 percent to 12 percent below last year, according to analysts.
For the first time in 36 years, U.S. meat production is expected to decline across the board as the slumping world economy pressures the industry, the U.S. Department of Agriculture said.
One saving grace for Smithfield Foods was the 2008 sale of its beef division to Brazilian-based JBS, approved by the Justice Dept. earlier this year.
Steve Kay, publisher of Cattle Buyers Weekly, said Smithfield needed to sell its beef division to remain viable and used that as a compelling argument to get Justice Dept. approval. Since then Smithfield has closed six pork plants and eliminated 1,800 jobs.
Earlier this week JBS, also strapped for cash, said it will issue $400 million in bonds due in 2014 needed to "reinforce its cash position at this moment of limited liquidity."
With large operations in the U.S and Brazil JBS ranks third in beef production behind Tyson Foods and Cargill Meat Solutions, according to Cattle Buyers Weekly.
Beef processing margins for U.S. packers have been negative for the past seven weeks resulting in large industry losses, Aslam noted.
Brazilian packers have suffered a similar fate, heavily leveraging their expansion plans in past years. These beef producers were hit hard by the tightened credit and falling demand caused by the global financial crisis of the past six months, analysts said.
