Lamb Weston Earnings: Despite Softer Restaurant Traffic, Pricing Bolsters Profitability; Shares Rich

Narrow-moat Lamb Weston delivered strong fiscal 2023 fourth-quarter marks, with net sales of $1.69 billion and diluted EPS of $1.22 outpacing our $1.66 billion and $0.89 preprint estimates, respectively. But management alluded to elevated potato costs in fiscal 2024 stemming from poor crops in North America and Europe, which led to 20% and 35%-40% increases in contract prices, respectively. Even despite these higher costs, management's fiscal 2024 outlook for net sales of $6.7 billion-$6.9 billion and diluted EPS of $4.95-$5.40 exceed our $6.6 billion and $4.77 preprint respective forecasts, and we anticipate bringing our estimates closer to the guided ranges. This should lift our $74 fair value estimate by a mid-single-digit rate, but after the 7% rout in the stock price and, even with this bump, shares still trade roughly 35% north of our intrinsic valuation. We believe the market is crediting seamless execution and overestimating the long-term growth prospects of the business and, as such, we'd suggest investors remain on the sidelines.