Smithfield piques IPO investor appetite with turnaround story, low valuation

The leading U.S. pork producer returned to the black last year, following an overhaul to streamline its operations by Chinese owner WH Group

Key Takeaways:

• Leading U.S. pork producer Smithfield has filed for a U.S. IPO, which could raise more than $1 billion as Chinese owner WH Group floats 20% of the company’s shares
• The listing could attract strong investor interest due to its relatively low valuation and an overhaul that saw Smithfield return to profitability last year

By Doug Young

2023 was a year many pork companies would rather forget, with some calling it possibly the worst year on record as costs soared for farmers with accelerating inflation at that time. But as that year fades into memory, profits are returning for many, including leading U.S. producer Smithfield Foods Inc.

The company’s owner, China’s WH Group (0288.HK), is seizing on the turnaround by serving up a Smithfield IPO, whose details were disclosed in a filing with the U.S. securities regulator this week. WH Group first indicated it planned to separately list Smithfield last July, and issued its own brief announcement this week on the application.

Investors have been quite excited about this spinoff, bidding up WH Group’s shares by as much as 34% over the last six months. And despite a recent pullback, the stock is still up 18% since last July, which isn’t bad for this kind of very old-economy stock. Still, the company currently trades at a relatively low price-to-earnings (P/E) ratio of just 8, well below the roughly 25 for both Chinese rival Muyuan Foods (002714.SZ) and U.S.-based Tyson Foods (TSN.US).

Smithfield didn’t provide any details on how many shares will be issued, nor any fundraising targets. But previous reports indicated WH Group plans to sell 20% of the company into the IPO and is aiming for a valuation of $5.8 billion. That would give Smithfield a P/E ratio of just 7.5, based on a projected profit of about $775 million for 2024, which is similar to WH Group’s ratio and even seems a bit low.

Even at such a low P/E, the listing is almost certain to raise more than $1 billion, which looks quite realistic given the low valuation. The list of underwriters is a who’s-who of major investment banks, including Morgan Stanley, Bank of America, Goldman Sachs, UBS and Citi, showing the financial community believes appetite for the shares will be strong.

While a rebounding pork market is one thing after the difficult 2023, Smithfield is also trying to sell investors on the steps it has taken to make itself meaner and leaner since its landmark purchase by WH Group for $4.7 billion in 2013. That deal was controversial at the time due to the purchase of such a famous U.S. food company by a Chinese buyer, even before U.S.-China tensions ratcheted up under Donald Trump’s first administration from 2016 to 2020.

But it eventually cleared all the regulatory hurdles, not least because Smithfield wasn’t in very good financial shape at that time and was in need of a makeover. The company was previously listed before the purchase, so this new IPO would represent a sort of homecoming to financial markets for Smithfield in its newer and leaner form.

Among other things, Smithfield has been closing processing facilities and downsizing its pig farming business throughout the U.S. and Mexico in the last three years. It also divested its European operation last year by transferring it to WH Group, which has allowed it to focus on its core business in the U.S., together with some additional operations in Mexico.

Outsourcing hog production

Smithfield divides its business into three main segments: packaged products, fresh pork and hog production. Of those, packaged products is the largest and most profitable segment, accounting for more than half of its revenue and an even larger slice of its profits. By comparison, pork production is the most problematic, involving high costs and subject to volatility due to swings in prices for pork and hog feed.

As pork prices fell in 2023, the company’s overall revenue fell to $14.6 billion for the year from $16.2 billion in 2022 and $15 billion in 2021. While the situation stabilized somewhat last year, the company’s revenue of $10.2 billion in the first nine months of 2024 was still down slightly from $10.6 billion in the year-ago period.

Among its three segments, only the packaged meat business has been consistently profitable over the last four years, including an $855 million profit in the first nine months of last year, up 13% year-on-year. The fresh pork segment is also generally profitable, though less than packaged meats, providing $196 million in profit in the first nine months of last year.

Hog production is the company’s clear Achilles heel in terms of profits, reporting losses every year since 2022. But in a positive sign, the losses are shrinking, including a sizable reduction to a $135 million loss for the segment in the first nine months of last year from a $627 million loss in the year-ago period.

Improvements across all the segments lifted Smithfield’s gross margin to 13.4% in the first nine months of last year, bouncing back from a low of 6.1% for all of 2023. As that happened, the company returned to the black with a net profit of $581 million in the first nine months of last year, reversing a $2 million loss in the year-ago period.

Besides closing facilities and reducing its product portfolio to focus on the most profitable ones, Smithfield’s other major initiative to improve its performance is reducing its in-house hog raising and sourcing more of its meat from contract farmers. The company said it currently gets about half of its hogs from in-house sources, but is aiming to reduce that to about 30% over the medium term.

“Our hog production segment’s transformation strategy is integral to our ongoing objective to further transition our business toward an increased mix of value-added, high-margin products,” it said in the prospectus. “This transformation allows us to reduce our capital investment and exposure to more volatile areas of the value chain.”

All those steps appear to be yielding results, as reflected by the company’s improving margins and profits. Those improving metrics, combined with the relatively low P/E ratio the company appears to be targeting, lead us to expect investor appetite should be healthy for this upcoming IPO despite its old-economy flavor.

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