Chicago - Shares of IBP Inc. climbed after the world's largest producer of fresh beef and pork said it expected fourth quarter earnings to be four times higher than last year's 23 cents a share.
Analysts linked the strong quarter to low hog costs that boosted profit margins, and to the fact that last year's earnings were depressed by Asia's financial crisis, but they cautioned that the windfall may be short-lived as hog prices begin to recover from 57-year lows.
“Because of the strong performance of IBP's fresh meats and foodservice operations, the company's fourth quarter results are expected to reach record levels,” Robert Peterson, chairman and chief executive officer of Dakota City, Neb.-based IBP, said in a statement.
“We currently project net earnings will be four times greater than last year's fourth quarter total,” he added.
That would put quarterly profits at 92 cents a share, ahead of analysts' expectations for 80 cents a share, according to First Call, which tracks such estimates.
Shares of IBP were up $1.00 at $29.25 -- just shy of the 52-week high of $29.44 -- on the New York Stock Exchange.
Last year, IBP's fourth quarter earnings were $22 million. For the full year, IBP earned $117 million, or $1.25 per diluted share.
Last year, economic turmoil in Asia slashed demand for U.S. meat products, trimming IBP's earnings. Asia is a key importer of U.S. meat. IBP's Asian exports suffered further last year when South Korea in 1997 halted beef imports from IBP after it found some meat contaminated with a potentially deadly strain of E.coli bacteria.
“The near-term issue is that pork packing margins have been exceptionally strong over this past quarter,” said David Nelson, a food industry analyst with Credit Suisse First Boston. “That is going to drive a good quarter.”
Huge hog supplies sent U.S. prices to their lowest level since 1941 this quarter, boosting profit margins for companies like IBP that buy hogs to slaughter and process into pork products. The low prices have been devastating for U.S. hog producers who were paid far less than it cost to feed and raise the hogs.
Erika Gritman Long, an analyst with J.P. Morgan Securities, said hog producers hard hit by the lower prices may begin culling herds, which will eventually lead to a tightening of supplies and higher hog prices. That could start to crimp IBP's profit margins in the second half of 1999.
Slaughter capacity could also fall next year. Long said stricter U.S. Agriculture Department regulations on meat inspection following a recent rise in cases of food-borne illnesses may drive some meatpackers out of business. Instead of making costly upgrades to older machinery, they may opt to shut down, she said.
“We would continue to look for a strong performance for the next six months,” she said. “After that, it becomes less clear. We should see a reduction in the number of hogs and cattle available for slaughter, but also some reduction in capacity.”
George Dahlman, an agribusiness analyst with Piper Jaffray, said the worst may be over for U.S. hog producers, but for IBP, the best profit margins may be behind them. Hog prices have already started to recover in the last week and should move higher in the next year, Dahlman said.
“They (IBP) have just experienced the best that they're going to see,” Dahlman said.
Meat Industry Insights News Service
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