Smithfield Foods: Compelling Buy with 33% Upside Potential Driven by Margin Expansion and Valuation Gap

Thomas Palmer, an analyst from Citi, has initiated a new Buy rating on Smithfield Foods (SFD).

Thomas Palmer’s rating is based on several compelling factors that make Smithfield Foods an attractive investment. One significant reason is the company’s ability to expand its margins within the Packaged Meats segment, surpassing competitors like Tyson and Hormel. This margin improvement is driven by share gains in deli and lunch meats and a more stable profit outlook in the Hog Production segment. Additionally, Smithfield Foods’ shares are currently trading at a valuation multiple significantly lower than its peers, which presents an upside potential for investors.
Moreover, the company is well-positioned to drive sales growth and further margin expansion in its core segments. The Packaged Meats segment, in particular, has outpaced its public peers in operational margin over the past four years, and further growth is expected, especially in deli meats and packaged lunch meats. The analyst’s target price of $28 implies a 33% upside, including a 5% dividend yield, making it a compelling buy. This target is based on a sum-of-the-parts analysis, considering different EBITDA multiples for each of the company’s segments, resulting in a blended multiple that justifies the Buy rating despite the limited liquidity.

In another report released yesterday, Goldman Sachs also initiated coverage with a Buy rating on the stock with a $32.00 price target.