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SFD Annual Report

Attached is a PDF file of a comparison between Smithfield (NYSE: SFD)
and other companies in the food processing sector. Two of these
competitors, IBP and Tyson, are direct competitors in the meat
processing industry; the others, Michael Foods and Dreyer's, are
companies that ValueLine either currently ranks highly for timeliness or
has in the past (at the time I first assessed Smithfield, Michael Foods
was hotly-tipped as well).

Smithfield's had a rocky year, attributable to a number of factors:
their North Carolina processing plants were flooded in last fall's
hurricane season; higher live hog prices have cut into their margins;
legislators from farm states are increasingly asking the Fed to look at
large food processors for possible antitrust violations.

This last factor isn't going to go away: SFD's vertical integration
strategy -- buying up as many pork producers and packers as current laws
will allow (and then some, according to several midwestern DA's) -- has
pushed industry consolidation to the point where any additional move on
the company's part incurs the wrath of farm state representatives, who
are wary of their constituents' loss of income if Smithfield buys fewer
hogs on the open market. That said, even though they've maxed out their
consolidation in the US, SFD's also been actively acquiring overseas
operations, where ValueLine expects the company to do well.

The other two factors, the floods and pork prices, are temporary in
nature. That hasn't stopped the market from backing away from Smithfield
in the last quarter, though: its stock price dropped to 14 7/8 in March
(compared to their 52-week high of 34 1/16) following the company's
announcement of a drop in Q3 net income to 17.5 million, or $.36 per
diluted share, compared to  $55.0 million, or $1.31 per diluted share,
in last year's record Q3.

The stock price seems to have entered a turnaround in the last week,
perhaps in reaction to Tuesday's news that SFD, along with five of its
competitors, plans to found an online B2B marketplace for meat and
poultry products. As with any step that cuts out the small farmer, this
move has already drawn the ire of legislators, but the street seems to
like the increased efficiencies that such a web-based market would

The company's fundamentals still look strong (Stock Analyzer still
projects a compound annual return of over 20%), and the attached PDF
file shows that in both sales and EPS growth SFD outperforms the
competition. IBP Inc. performs better on Percent Earned on Invested
Capital, but SFD comes in a strong second, as it does on estimated EPS
for the next five years. SFD offers the best upside-downside ratio (5.5
to 1), though their current PE ratio of 9.2 ranks behind Tyson and IBP
-- but ValueLine feels that their historical earnings volatility will be
reduced when their vertical integration strategy is fully in place.

The fact is that, compared to high-tech and biotech holdings,
Smithfield's never going to amaze us -- ValueLine ranks the Food
Processing industry 78 out of 91 for timeliness, and will probably lag
the market in the coming months; also, I expect that price swings in the
commodities market will continue to affect SFD's stock price, which
could make it one of our more volatile holdings. On the other hand,
given the current state of the high-tech sector, diversity in our
portfolio is more important than ever, and once SFD's recent production
and packaging purchases are integrated I think we'll see a much better
return on our investment than in our first 12 months.

Sean Thomas

sfd comparison.pdf