Is Smithfield Foods a Worthwhile Investment?

With shares of Smithfield Foods (NYSE:SFD) trading around $34, is SFD an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

Smithfield Foods produces and markets a variety of fresh meat and packaged meat products both domestically and internationally. It operates in four segments: Pork, Hog Production, International, and Corporate, each of which consists of a number of subsidiaries, joint ventures, and other investments. Fresh and packaged meats are essential food choices for many consumers around the world. As populations grow and consumers look to add these options to their food choices, companies like Smithfield Foods stand to see significant profits. So long as demand for meat products exists and populations expand, Smithfield Foods will continue to be a strong company.

Smithfield Foods’s acquisition by Chinese meat producer Shuanghui International is expected to close by September 26, as it is believed 50 percent of Smithfield investors will approve the deal. Smithfield’s shareholder meeting to vote on the deal is scheduled for Tuesday, Reuters reports. The $4.7 billion deal would be the largest Chinese takeover of a U.S. company. It has faced significant backlash from consumers and lawmakers over food safety concerns.

T = Technicals on the Stock Chart Are Strong

Smithfield Foods stock has moved significantly higher in the years extending back to the financial crisis. The stock is currently fairly stagnant, as a takeover of the company may be imminent. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Smithfield Foods is trading above its rising key averages, which signals neutral to bullish price action in the near term.

SFD

Source: Thinkorswim

Taking a look at the implied volatility and implied volatility skew levels of Smithfield Foods options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Smithfield Foods Options

5.32%

0%

0%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of Wednesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Mixed Quarter Over Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Smithfield Foods’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Smithfield Foods look like and, more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-32.50%

-56.59%

18.37%

-90.54%

Revenue Growth (Y-O-Y)

9.77%

3.47%

3.02%

-2.62%

Earnings Reaction

-0.11%

-0.03%

10.67%

0.34%

Smithfield Foods has seen decreasing earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Smithfield Foods’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Smithfield Foods stock done relative to its peers – Tyson Foods (NYSE:TSN), Hormel Foods (NYSE:HRL), and Seaboard (

target=”_blank”>NYSE:SEB

) — and sector?

Smithfield Foods

Tyson Foods

Hormel Foods

Seaboard

Sector

Year-to-Date Return

58.04%

55.82%

39.15%

10.72%

35.68%

Smithfield Foods has been a relative performance leader, year to date.

Conclusion

Smithfield Foods is a provider of fresh and packaged meat products that are seen as a staple food item for many consumers and growing populations worldwide. A takeover of the company is believed to be going through after a shareholder vote scheduled for Tuesday. The stock has been moving higher in recent years and is now trading slightly below all-time high prices. Over the last four quarters, investors have had mixed feelings about the company, as earnings have been decreasing and revenues have been rising. Relative to its peers and sector, Smithfield Foods has been a year-to-date performance leader. WAIT AND SEE if a vote to acquire Smithfield Foods goes through.

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