I don’t smoke weed, but I am addicted to title-spam. So happy 4/20!
The following is a very simple fundamental analysis of Smithfield Foods (NYSE:SFD) I performed for a Fundamentals of Investments course. I’m posting it because I have nothing else to post. Also, maybe this will show up on some future education searches, and I’ll be plagiarized. That’s every blog owner’s dream.
Full disclosure: None.
“Any way you slice it (pun intended), Smithfield Foods appears a firm currently in bad financial shape. In the relatively low risk Meat Products industry, it is being hammered by its competition. With a negative ROE, SFD is seriously outperforming its industry. In fact, competitors within the industry are actually doing quite well, beating the S&P in both ROE and ROA. A small consolation for SFD is it’s lower margin of financial leverage than fellow industry partners. The industry is leveraged by a factor of 4, whereas SFD is only leveraged by a factor of ~3. The competition is using this leverage very profitably at the moment, whereas SFD is at least stemming the tide of blood in its losses. This lower level of financial leverage may allow SFD to turn profitable sooner, although it would also limit the levels of profits it could achieve due to leverage.
Fundamentally speaking, there may be a silver lining on the horizon. SFD’s DuPont system ratios (aside from Profit Margin) show SFD may be ready to jockey its way to greater profitability in the future. It is turning over inventory at a much higher rate than industry norms. This reflects on a higher than average ATO, and shows efficiency in production. Coupled with much higher than industry average Interest Coverage and Current Ratios SFD appears to at least have the assets it needs to operate. Perhaps underproduction is an issue the corporation needs to address.
Finally, it appears that although SFD has weak profitability (astoundingly high P/E ratio!) it’s low Market to Book makes it an attractively priced investment, if only with the possibility of liquidation. Earnings forecasts predict the entire industry will under perform the S&P during the coming years by a factor of more than 2. Given this forecasting, it is safe to say SFD is not “safe” at all, which is reflected by a very high Beta value.
So what would I recommend to an investor looking at SFD? As always it depends on situation. Should the investor be looking for the stability the industry normally affords, I would recommend they not hold positions in SFD. It is currently spectacularly under performing its peers. However, a more risk friendly investor might find SFD an intriguing option. It appears to be a company with a sound asset base and the means to grow. With it’s low market to book, it’s a particularly attractive investment that could produce substantial growth if the company “turns it around” or is taken over and liquidated.
Return on Equity (ROE) = -5.66 [Ind: 21.59, Sec: 29.29, S&P500: 18.97]
Return on Assets (ROA) = -2.02 [Ind: 5.35, Sec: 10.87, S&P500: 8.00]
DuPont System ratios:
Profit Margin: -1.30 [Ind: 4.92, Sec: 11.10, S&P500: 10.32]
Total Asset Turnover: 1.56 [Ind: 1.24, Sec: 1.07, S&P500: 1.02]
Interest Coverage Ratio: 3.11 [Ind: 0.06, Sec: 0.59, S&P500: 32.21]
Leverage Ratio: 1.11475 [Ind: 1.05168, Sec: 1.05474, SP: 1.11493]
Inventory Turnover Ratio: 5.52 [Ind: 0.94, Sec: 0.79, S&P500: 10.95]
Current Ratio:2.08 [Industry: 1.33, Sector: 1.21, S&P500: 1.76]
Quick Ratio: 0.65 [Industry: 0.65, Sector: 0.65, S&P500: 1.24]
Market-to-Book Ratio: 0.56 [Ind: 1.28, Sec: 1.64, S&P500: 2.99]
Price-Earnings Ratio: 429.40 [Ind: 15.43, Sec: 15.26, S&P500: 15.66]
Earnings Yield: -10.1071 [Ind: 2.4765, Sec: 2.1098, S&P500: 8.0134]