Lamb Weston Earnings: Strong Execution and Top-Line Momentum Encouraging but Shares Overcooked

Narrow-moat Lamb Weston booked solid (August-ended) fiscal 2024 first-quarter results as its organic net sales shot up 15% and its adjusted operating margin improved 590 basis points to 19.8%. A favorable mix and higher prices contributed 23% sales growth, but volume fell 8%. While the volume decline in its international arm (32% of sales) was particularly pronounced, slipping 27%, we don’t think this mark raises a red flag. For one thing, management attributed the bulk (90%) of the decline to the firm’s decision to exit select lower-priced and lower-margin contracts abroad. For another, inventory destocking activities by certain customers partially impaired its volume, but we don’t anticipate that this will prove to be a drag. Reflecting its strong results and outlook, management lifted its full-year net sales guidance to $6.8 billion-$7.0 billion from $6.7 billion-$6.9 billion and its diluted EPS guidance to $5.47-$5.92 from $4.95-$5.40. We intend to move our near-term forecasts into the new guided range. Although this should bump up our $74 fair value estimate by a high-single-digit rate—in line with the shares’ uptick after the report—the stock remains expensive, so we continue to encourage investors to await a more attractive entry point.