Does Smithfield Foods Have a Good Deal?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Smithfield Foods (NYSE: SFD) has received a merger offer of $34 per share from the Hong Kong-based holding company, Shuanghui International Holdings. At $34 per share, the deal is valued at as much as $7.1 billion, including Smithfield’s net debt. Since the beginning of the year, Smithfield has advanced significantly, by more than 52.4%.

Let’s take a closer look to see whether or not Smithfield is fairly valued at the acquisition price.

Business snapshot

Smithfield is the producer of a wide range of fresh meat and packaged meat products, operating in four main business segments: Pork, Hog Production, International and Corporate. Most of its revenue, $11 billion, or 70.5% of the total revenue, was generated from the pork segment while the hog production produced more than $3 billion in 2012 revenue. The pork segment was also the biggest profit contributor, with $623.7 million in operating profit. Hog production ranked second, with $166.1 million in income while the International segment generated only $42.8 million in operating profit in 2012.

In the past ten years, Smithfield has managed to grow its revenue from $7.9 billion in 2003 to more than $13 billion in 2012. Net income has grown from $26 million to $361 million during the same period. However, Smithfield produced losses of $190 million in 2009 and  $101 million in 2010, respectively. The losses were due to much higher cost of goods sold and higher interest expense.

Smithfield seems to have quite a strong balance sheet. As of January 2013, it had more than $3.2 billion in equity, $138.6 million in cash and more than $1.85 billion in long-term debt and capital lease obligations. The majority of its assets, $2.39 billion, were inventories while the goodwill and intangible assets were more than $1.18 billion. Consequently, its tangible book value was more than $2 billion. At $34 per share, Smithfield Foods is worth more than $4.7 billion on the market. The offering price values Smithfield Foods at nearly 8.7 times Enterprise Value over Earnings Before Interest, Taxes, Dividends and Amortization (EV/EBITDA).

Hormel Foods is really a dividend stock

Smithfield’s valuation is lower than Hormel Foods Corporation (NYSE: HRL), but higher than Tyson Foods (NYSE: TSN).

Hormel Foods is trading nearly $39 per share, with the total market cap of $10.3 billion. The market values Hormel Foods at as high as 12.5 times EV/EBITDA. Hormel Foods has just recently reported its second quarter earnings results. Its revenue rose by 6.9% to more than $2.15 billion. However, its earnings declined a bit, from $127.9 million in the second quarter last year to $125.5 million in the second quarter this year. For the full year,

Hormel Foods maintained its full-year earnings per share (EPS) estimate in the range of $1.93 to $2.03 per share. What might attract income investors to Hormel Foods is its consistent dividend payment in the past ten years. Since 2003, its dividend has increased from $0.21 per share to $0.60 per share. In the second quarter earnings announcement, Hormel also announced that it paid quarterly dividend of $0.68 per share.

Tyson Foods has the lowest valuation

Tyson Foods has the lowest EV multiple among the three. At $24.80 per share, Tyson Foods is worth around $8.8 billion on the market. The market values the company at only 6.17 times EV/EBITDA. Tyson operates in four main business segments: Chicken, Pork, Beef and Prepared Foods.

Chicken is the biggest operating income source of Tyson Foods, with $446 million in operating income in 2012. Among those segments, the pork business enjoyed the highest operating margin at nearly 7.6%, while the operating margin of the chicken segment was only 3.85%. The prepared foods segment contributed around $181 million in income, with the operating margin at 5.6%.

Recently, Tyson Foods acquired the assets of Circle Foods, a producer of frozen handheld Mexican foods under several brands including TORTILLALAND and NEUVO GRILLE. According to the company, it would keep Circle Foods’ management and production team to operate the business. Donnie Smith, Tyson Foods’ president and CEO commented that the deal would be “an excellent fit within the branded consumer products group”. He also said: “We believe Tyson's robust sales structure, as well as our frozen and refrigerated foods distribution system, will enable this business to accelerate its growth."

Among the three food companies, Hormel Foods pays the highest dividend yield at 1.7% while Tyson Foods offers investors only 0.8% dividend yield. Smithfield Foods do not pay any dividends.

My Foolish take

Smithfield Foods seems to have a reasonable offer for its business. Tyson Foods CEO said that the Smithfield acquisition deal would help to intensify globalization within the agriculture industry. Both Tyson and Smithfield could benefit in terms of pork exports, especially to China, as China is considered to have the largest pork market in the world.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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