By Lyle Niedens.

Bridge News

KANSAS CITY (B)--Shares of Smithfield Foods Inc., the biggest U.S. pork processor, reached an all-time high June 6 as the company's quarterly profits once again exceeded Wall Street's expectations. But Joe Luter, Smithfield's chief executive, thinks they are still undervalued.

This year's amount excludes a $5 million gain, equaling nine cents per share, on the sale of a Canadian plant and part of the company's stake in rival meatpacker IBP. But it still surpassed by three cents per share the consensus projection of analysts surveyed by First Call/Thomson Financial.

During the quarter, Smithfield's revenues grew 8% to $1.5 billion as operating profits for processed meats more than doubled despite rising hog prices. At the same time, the company's hog production unit benefited from the surging hog market as operating profits in that unit rose 17%.

Smithfield's shares rose 3%, or 1.05, to as high as 38.75 in moderately heavy trading by noon as investors lauded the company for completing a fiscal 2001 in which quarterly profits repeatedly outpaced Wall Street's projections.

For the year, the company's net income soared 133% to $175 million, excluding the sale of IBP stock, even though sales rose just 13% to $5.9 billion.

Those results reflect a U.S. hog market that has turned in Smithfield's favor.

The company, also the country's biggest hog producer, is the only vertically integrated pork marketer in the nation and produces about 60% of the hogs it slaughters.

The strategy is designed to avoid the cyclical downturns that often cause hog producers to flourish while processors flounder, or vice-versa. But market semantics in fiscal 2001 allowed Smithfield to prosper in both endeavors.

During a conference call with industry analysts and investors the morning of June 6, Luter said he thinks hog prices, having recovered nicely from a severe crash in 1998, should remain steady for the rest of the calendar year.

Hog futures prices at the Chicago Mercantile Exchange suggest the market will decline from the current price of 66 cents a pound for July delivery. But Luter said most analysts six months ago thought hog prices already would have dropped, and they were wrong.

Because U.S. hog production ebbs and flows in four-year cycles and the overall market is unpredictable, Luter refuses to predict earnings for his company.

However, with his general expectation for current market conditions to persist during the first half of Smithfield's fiscal 2002, he is confident the company's profits will continue climbing. Meanwhile, as it dramatically increases marketing for its new case-ready pork program, he sees even brighter days ahead in the long run.

"I am very optimistic that the next five years will be as good or better than the last five years," he said.

In the meantime, the company plans to continue repurchasing its shares because Luter thinks they are too cheap.

Smithfield's profit growth has easily topped all food processors in the past 18 months, yet its price-to-earnings ratio of 12-to-1 remains one of the lowest in the food industry. Its two biggest pork processing rivals, IBP and Hormel Foods, have P/E ratios of 14-to-1 and 20-to-1, respectively.

Luter contends Smithfield's vertical integration makes it a more reliable profit producer than those two companies, though a bad pork-market swing can yield difficult quarters from time to time.

"If you look at us in four-year cycles, we are as predictable as the sun coming up tomorrow morning," he said.

Ken Gassman, an analyst with Davenport & Co. who has followed the company's progress for about 20 years, could not agree more. "Smithfield is doing well, and its prospects are good," Gassman said. "Joe Luter is right. If you own the company for the long term, you are in good shape."

In addition, Gassman downplayed concerns about the potential for the hog market cycle to turn against Smithfield in the next several months, mostly because of Luter's expertise.

"Joe Luter has done a tremendous job in a tough, tough industry," he said.

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