The company announced a $150 million stock buyback as well Thursday and shares jumped more than 4 percent in afternoon trading.
The pork industry had stagnated as consumers pulled back on spending in restaurants and on pricier ham in favor of cheaper food as the economy struggled after the recession. There are signs that demand has returned and Smithfield was finally able to pass on the higher costs it had been paying for corn and soybeans to feed its hogs.
"The fundamentals are very strong for the industry, I think," CEO C. Larry Pope told analysts during a conference call. Companies like Smithfield had to swallow higher feed costs for years as retail prices lagged, but now big grocery chains and restaurants feel they can charge more for meat, boosting Smithfield's profit margins.
"No one wants to push through price increases, but it's a reality of life," Pope said.
Smithfield reported net income of $98.4 million, or 59 cents per share, for the three months ended May 1. That compares with a net loss of $4.6 million, or 3 cents per share, a year ago. Removing a charge tied to early debt retirement, adjusted earnings were 85 cents per share, beating the average forecast of 82 cents per share, according to analysts polled by FactSet.
While hog and pork prices have rebounded, industry analysts are unconvinced that consumers have overcome their economic jitters, which would leave Smithfield with high feed prices but a diminished ability to cover those costs.
KeyBanc Capital Markets analyst Akshay Jagdale noted that hog prices have already fallen from their peak levels in May. With prices likely to be lower into 2012, Smithfield's long-term profits could become crimped, Jagdale said.
"The concern that I have ... is: were these peak earnings?" Jadgale said.
Pope told analysts that export markets might be able to pick up any slackening in the U.S. With China looking to control food costs however it can, U.S. pork imports are starting to look more attractive, Pope said.
"I think double digit increases in exports is very doable for this industry," Pope said. "The telephone is active. That's why I think there's a lot of upside for these pork (profit) margins."
While pork demand is clearly rising in China, it's tough to predict just how much pork the country will ultimately import, Jagdale said. It's tough to get reliable data on the Chinese economy, so predicting pork demand is a guessing game.
"Really, China is a wild card," Jagdale said. "Our belief is that they will continue to buy (pork) opportunistically, but they are very much committed to growing their hog supplies internally."
During the fourth quarter, Smithfield's revenue increased 7 percent to $3.12 billion from $2.91 billion, just shy of Wall Street's estimate of $3.19 billion. The improvement over last year's sales was driven by sales of fresh pork and packaged meats, which both improved during the quarter. Lower U.S. hog inventories also led to a 19 percent increase in live hog prices.
For the year, the Smithfield, Va., company reported net income of $521 million, or $3.12 per share. In the prior year it lost $101.4 million, or 65 cents per share.
Revenue climbed 9 percent to $12.2 billion from $11.2 billion. Some of the strongest sellers were Armour LunchMakers, Curly's Barbecue, Kretschmar Deli and Smithfield Marinade.
Analysts forecast full-year earnings of $2.94 per share on revenue of $12.28 billion.
Smithfield said it will repurchase up to $150 million of its shares over the next two years using cash on hand.
Pope said Smithfield's stock is undervalued and the company backed that belief up with the investment. The stock is near the high end of its trading range over the last year, having swung between $13.34 and $24.93 per share. It is still far below its pre-recessionary levels, when it traded above $33 per share in 2007.
Shares rose 90 cents, or 4.4 percent, to $21.29 in late afternoon trading.
