Smithfield shares decline 7.7%

Shares of Smithfield Foods Inc., the world's largest hog and pork producer, had their biggest decline in more than two years Wednesday after the company said profit growth in the first quarter was slowed by losses on hedging.

Smithfield fell $2.13, or 7.7 percent, to close at $25.37 per share on the New York Stock Exchange, the biggest one-day decline since February 2002. Before today, the stock was up 34 percent.

The company, which is based in Smithfield, Va., and owns Circle Four Farms in Utah, said in a faxed statement that it failed to benefit from a rise in hog prices during the quarter ended Aug. 1, limiting net income to $50 million to $56 million, or 45 cents to 50 cents a share. Smithfield was expected to earn 58 cents, based on the average estimate of nine analysts surveyed by Thomson Financial.

"They have tended to hedge parts of their business in the past, be it hog costs or their feed inputs," said Ann Gurkin, an analyst for Davenport & Co. in Richmond, Va. "The question is when were these losing hedges unraveled and what will be the impact on second- quarter earnings."

Hog prices rose as much as 45 percent this year as demand for pork surged following bans on U.S. beef imposed by importers because of a single case of mad cow disease in Washington state. Hog futures on the Chicago Mercantile Exchange rose to the highest price in almost seven years in June, touching 78.6 cents a pound.

Repeated calls to Smithfield spokesman Jerry Hostetter weren't immediately returned. The company said it will report earnings on Aug. 26.

Results for the recent quarter include losses on "commodity positions as the company locked in profits in the hog production group at lower levels earlier in the calendar year and, as such, did not fully benefit from these higher live hog prices," Smithfield said in the statement.

The company didn't elaborate.

In the year-earlier first quarter, Smithfield reported net income of $22.1 million, or 20 cents a share.

Merrill Lynch & Co. analyst G. Leonard Teitelbaum cut his earnings forecast for Smithfield to $2.17 a share for fiscal 2005 from an earlier prediction of $2.43. He also cut his fiscal 2006 forecast to $2.34 from $2.55. Merrill reiterated its "buy" rating on Smithfield stock.

"Despite the clip the stock has taken on the news, we are sticking with our buy rating because we think that fundamentals, particularly in beef, should strengthen throughout the year," G. Leonard Teitelbaum, a first vice president at Merrill Lynch in New York, said in a note to investors.

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