Smithfield Profit Crashes 63%, but It Doesn't Really Matter

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Similar to its pigs, pork pusher Smithfield Foods had a rough day yesterday. With profits down more than 60% in the fourth quarter, the company missed analyst estimates. However, the stock reacted as if nothing happened, largely due to the fact that just a couple of weeks ago, the company agreed to a buyout offer valuing it at a small premium to today's stock price. Even though investors may be sitting pretty, the company faces challenges that beleaguer many in its industry. Let's take a closer look at the current state of Smithfield Foods.

Earnings recap
Starting at the top of income statement, Smithfield was able to increase revenue 3%, to $3.32 billion. Analysts had actually been expecting a lower number -- $3.27 billion. As we move down the sheet, though, things get ugly. Due to skyrocketing costs and pricing pressure, net income fell 63%, to $29.7 million, or $0.21 per share. In the year-ago quarter, the company earned $0.49 per share, though investors should note this included a near $17 million one-time benefit. Analysts were expecting $0.42 per share for the quarter, marking a very large miss.

The cause, as mentioned, was the high cost of being in the meat business today. Feed costs have been hurting many companies, from dairy producers to ranchers. Usually, a company would pass this price hike along to consumers, and many have, but Smithfield has been trying to manage the costs without alienating a still-sensitive consumer. With all of the substitute products available, a slight increase in pork prices could push shoppers toward a cheaper protein such as chicken.

Hurting the business even further, pork exports dropped materially, especially to Russia and China.

Forward-looking guidance is not available, as the company's management has discontinued investor communications due to the impending buyout, described below.

Impending buyout
Expected to close in the back half of this year, Smithfield's board agreed to a more than $7-billion takeover from a Chinese meat-processing firm. The takeover marks the largest of its kind -- its kind being a Chinese buyout of a U.S. firm.

The deal is expected to close, though it still must go through U.S. regulators, as well as shareholders. The latter should not be an issue, as the offer gives investors a decent premium to their investment, and rids them of a business caught in a tough spot between rising costs and the inability to pass costs on.

As you can likely take away by now, the shoddy earnings are relatively irrelevant to shareholders. Unless the buyer backs out of the deal, which is highly unlikely, or federal regulators block the bid, Smithfield will soon delist and head overseas. Investors should not dump their shares based on these earnings.

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