SMITHFIELD, VA. — With companies like Kraft Foods Inc., Ralcorp Holdings and Dean Foods Co. all separating various components of their businesses, it has become commonplace for securities analysts to view companies in terms of their parts rather than as a whole. PepsiCo, Inc. has garnered such attention as well as Smithfield Foods, Inc., the world’s largest pork processor.
On Dec. 6 the company issued its financial results for the second quarter of fiscal 2012 and in a conference call with analysts, Larry Pope, president and chief executive officer, offered his opinion on why it would not make sense to separate Smithfield’s meat processing and hog raising operations.
“I’ve looked at that idea,” Mr. Pope said in response to an analyst’s question regarding a spin-off. “It’s complex and not easy to do. And you’d be surprised how integrated this business is, particularly the pieces (and) how they tie together.”
But in earlier comments, Mr. Pope described Smithfield Foods as “essentially two companies” made up of a commodity-based live production company and a fresh and processed consumer-packaged meats company.
“The consumer packaged meats company generates, just the packaged meats side, approximately $6 billion in annual sales, larger than many of our competitors in the same packaged meats space,” Mr. Pope said. “That business, combined with our fresh pork business, generates $600 million to $700 million in operating profits and even more on an EBITDA basis.
“If you value this segment like our competitors, I think you will see this business alone is essentially worth more than the whole market capitalization of Smithfield Foods. That means our live production and international business all combined are worth very little.”
Early in Smithfield’s history, in the 1980s, the company invested in its hog production operations and Mr. Pope said that business “carried the company” and allowed management to invest in many of the packaged meat assets Smithfield owns today.
“Profitability has fallen off in the past few years as the price and volatility of corn have wreaked havoc on this side of the business,” he said.
But Mr. Pope added that what the company’s hog production operations may lack in profitability is balanced by their strategic value.
“The farms make a difference,” he said. “We can do things on the farm that get us business no one else can do.
“And so I think I’m going to be reporting to you again and again going forward how these farms are adding value. The only thing I’m asking you to do is look at the value. We don't need to break the company up. You guys — the market needs to understand how strategically important this is. And we’re trying to communicate it to you. And I’ll keep talking. I don’t know if you’re listening, but I’ll keep talking.”
For the quarter ended Oct. 28, Smithfield Foods had income of $10.9 million, equal to 7c per share on the common stock, which compared with income of $120.7 million, or 74c per share, during the same quarter of the previous year. Sales for the quarter were $3,225.8 million, down 3% from $3,312.6 million during the same quarter of the previous year.The Hog Production segment recorded an operating loss of $32.6 million, which compared with an operating profit of $63.9 million during the same quarter of the previous year. Sales for the segment were $734 million, down 7% from $785.3 million.