Smithfield shares rise on analyst upgrade, higher expectations for hog profitability

Hog producer Smithfield shares rise on upgrade

MILWAUKEE — Shares of Smithfield Foods Inc. rose on Tuesday after an analyst upgraded her rating on the stock just days before its quarterly results are due.

Stephens Inc. analyst Farha Aslam upgraded shares of the nation’s largest hog and pork producer to “Overweight” from “Equal Weight,” she wrote, “in anticipation of an improvement in hog production and profitability.”

She increased her price target for shares to $20 from $16.

Smithfield shares rose 48 cents, or 3 percent, to $16.64 in afternoon trading, after trading as high as $16.97 earlier in the day.

The Smithfield, Va., company and others in the industry have been working through a downturn since at least last year due to high grain costs and an oversupply of hogs on the market, which makes it difficult for companies to raise prices. Producers have seen their profits shrink, so they have been shedding production to help bolster pricing and restore profits. Aslam said there is more improvement on the way.

“We believe that a turnaround, albeit a slow one, will become more evident in the coming year,” she wrote to clients.

Aslam said her upgrade of the stock is linked to increased confidence that fears of the H1N1 virus will not hurt demand for Smithfield products. The illness, also known as swine flu, caused concern among people about eating pork, even though scientists agree humans cannot contract swine flu by eating pork. Aslam said the industry was concerned about the impact of this winter’s flu season on demand, but those fears don’t seem to have come true. U.S. consumption of pork is at record levels, she said, and the meat is being heavily featured in stores.

She also credits production cuts, improving pork exports and other factors such as a clearer look at the U.S. grain harvest.

Smithfield reports its fiscal second-quarter results on Thursday before the market opens. Analysts surveyed by Thomson Reuters forecast a loss of 39 cents per share, on average, with Aslam forecasting a narrower loss of 33 cents per share.