Virginia-based Smithfield Foods (SFD) has succumbed to declining meat consumption world-wide and announced a major restructuring which will cost 1,800 people their jobs and will require the relocation of another 1,200 workers to other company facilities around the country.
Smithfield will be closing six of its operating plants and reducing the number of independent operating units from seven to three. The moves will save the company $55 million in 2010 and $125 million in 2011.
Smithfield is the world’s largest pork producer by revenue. The company accounts for nearly one-third of the total pork production in the U.S. and employs over 52,000 people. Smithfield’s highly recognizable brands include Smithfield, Butterball, Farmland, John Morrell, Armour, Cooks and Curly’s.
Smithfield’s business, like that of its competitors Hormel (HRL) and Tyson (TSN), has been impacted by the slowing economy, an oversupply of meat products world-wide, tight credit markets affecting exports and a drop in restaurant spending.
The restructuring announced by the company will, according to company Chief Executive Officer C. Larry Pope, allow the company to focus its production and marketing on the higher-margin packaged meat business.
SFD is currently trading at around $9.00 per share, well above the 52-week low for the stock of $5.40 reached in mid-November. Investors’ concerns regarding the company’s liquidity squeeze have been addressed through a restructured borrowing agreement with the company’s U.S. and European lenders.
The restructured agreement cuts the applicable interest coverage ratios through the third quarter of 2010 and will lower interest payments on outstanding debt through that period.
Investors in the company’s bonds have responded with enthusiasm to the improvement in liquidity by bidding up the price on Smithfield bonds. Company bonds due in 2017, for example, carrying a 7.75% coupon traded in the mid-forties as recently as December 10, returning 22.5% to the investor. These same bonds most recently traded at a price of just over 64, nearly 50% over the December low, resulting in a yield of 15.5%.
Recent actions by Smithfield and the company’s primary competitors have begun to reduce the oversupply of meat products and are improving profit margins. It is questionable, however, to what extent consumers can be brought back to the brand label market from the white label trend which is dominating the market today. Cost-conscious consumers are finding the store label products to be equally nutritious and less costly than the familiar brands.
For Smithfield, the reorganization of the company and the restructuring of borrowing terms should improve profitability in 2010 and beyond. Considerable marketing, however, will be required if the company hopes to win back the consumer who has discovered value in store brands.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
