Morgan Stanley analyst Dara Mohsenian initiated coverage on Smithfield Foods Inc (NASDAQ:SFD) with an Overweight rating and a price forecast of $28.00.

Since being acquired by WH Group in 2013, SFD has evolved into a more streamlined, profitable, and resilient protein business, achieved through operational improvements, refining its product and customer portfolio, and recently downsizing its hog production, said the analyst.

Smithfield Foods, a value-added packaged meats and fresh pork company, went public again in January, pricing its IPO at $20.00 per share.

As a result, the company has increased its focus on value-added packaged meats, leading to a significant rise in profitability.

From 2014 to 2024, EBITDA margins are projected to expand by over 300 basis points, with packaged meats margins improving by approximately 700 basis points.

The analyst expects SFD to continue to perform well, with a 10% EBITDA growth forecast over the next two years, driven by its strong position in trending pork categories, innovation, and a stable commodity business.

Smithfield is primarily involved in the pork industry, which has been a large and historically stable market, with per capita consumption growing at around a 1% compound annual growth rate (CAGR) over the past decade.

The analyst notes the sector is well-positioned to capitalize on changing consumer preferences that are driving strong demand for protein, such as increased focus on health, wellness, and high-protein diets.

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The analyst expects the company’s EBITDA margin to expand by approximately 130 basis points over the next two years, driven by favorable mix benefits in Smithfield’s packaged meats segment.

Additionally, the analyst mentions Smithfield has the potential to capture market share in underpenetrated categories, such as packaged lunch meats (a category worth over $6 billion), and expand its distribution with current retail partners.

While Smithfield is actively scaling back its hog production, favorable feed costs and rising hog prices indicate a positive outlook for hog producer margins into 2025.

The analyst views Smithfield’s strong net leverage position and free cash flow generation as favorable factors for delivering attractive returns to shareholders.

The company aims for a dividend payout ratio of about 50% (~5% yield) and presents opportunities for additional returns via share buybacks over time.

The analyst views current valuation of 5.8x ’25e EV/EBITDA as attractive relative to SFD’s financial profile (~10%e EBITDA CAGR ’24-26), supported by comparisons to public market protein peers.

Price Action: SFD shares are trading higher by 0.97% at $21.31 at the last check Monday.

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This article Smithfield Foods' Post-IPO Momentum: Morgan Stanley Sees Attractive Value In The Transformed Company originally appeared on Benzinga.com

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