Company Reports

Narrow-moat Lamb Weston reported fiscal 2024 fourth-quarter sales down 5% to $1.6 billion and adjusted EBITDA down 15% to $283 million. These results massively missed both guidance ($1.7 billion and $362 million, respectively) and our forecast ($1.69 billion and $369 million, respectively). Most of the sales and EBITDA shortfall came from an 8% volume decline, more than half of which was attributable to market share loss and one-fourth to soft restaurant traffic. Worse still, the company expects these woes to continue into fiscal 2025. Thus, we are cutting our fair value estimate to $95 per share from $110 on weaker near- and medium-term outlooks.

Lamb Weston offers investors pure-play exposure to the frozen potato market as North America’s largest producer (more than 40% share), followed by McCain (30%), Simplot (20%), and Cavendish (7%-8%) though it trails McCain globally. The company primarily sells French fries to other businesses like quick service restaurants. Despite its niche focus, we view frozen potatoes as boasting robust demand growth and balanced supply.

We see value in narrow-moat Lamb Weston’s shares, now sitting in 4-star territory and more than 20% below our $110 fair value estimate. Although near-term risks are prevalent, we see attractive upside that more than justifies these challenges.

Narrow-moat Lamb Weston reported disappointing fiscal 2024 third-quarter earnings. A disastrous rollout of a new ERP system led to incorrect estimates of inventory levels at distribution centers, leading to a drop in customer fulfillment rates, lost market share, and inventory write-offs. Additionally, the company cited sluggish restaurant traffic, which is expected to extend through the fourth quarter. These challenges lead us to cut our fiscal 2024 revenue and adjusted EBITDA forecasts by 5% and 7%, respectively, and, consequently, lower our fair value estimate to $110 per share from $120.

Lamb Weston offers investors pure-play exposure to the frozen potato market as North America’s largest producer (more than 40% share), followed by McCain (30%), Simplot (20%), and Cavendish (7%-8%) though it trails McCain globally. The company primarily sells French fries to other businesses like quick service restaurants. Despite its niche focus, we view frozen potatoes as boasting robust demand growth and balanced supply.

Lamb Weston offers investors pure-play exposure to the frozen potato market as North America’s largest producer (with more than 40% share), followed by McCain (30%), Simplot (20%), and Cavendish (7%-8%) though it trails McCain globally. The company primarily sells French fries to other businesses like quick service restaurants. Despite its niche focus, we view frozen potatoes as boasting robust demand growth and balanced supply.

After digesting narrow-moat Lamb Weston’s fiscal second-quarter earnings that had few surprises, we expect to raise our fair value estimate of $117 per share by a low-single-digit percentage, mostly due to the time value of money. Since reaching a nadir after the company’s analyst day in October, shares have rallied more than 25%, outperforming the Morningstar U.S. Market Index return of 10% over the same period. But we think shares still offer attractive risk-adjusted upside on top of a quarterly dividend payment that was increased 29% last month (1.4% forward yield).

We’ve raised our fair value estimate for Lamb Weston to $117 per share from $74, after updating our forecasts for higher volume growth (about 200 basis points more per year to 4.5%) and revisiting our cost of equity assumption (down to 7% from 9.5%, which is more in line with most food producers). Shares traded near our fair value estimate as recently as May, and we think the market now undervalues its long-term growth potential while overvaluing cost and crop volatility.

Lamb Weston offers investors pure-play exposure to the frozen potato market as North America’s largest producer (with more than 40% share), followed by McCain (30%), Simplot (20%), and Cavendish (7%-8%) though it trails McCain globally. The company primarily sells French fries to other businesses like quick service restaurants. Despite its niche focus, we view frozen potatoes as boasting robust demand growth and balanced supply.

We don't plan any incremental change to our $74 fair value estimate following narrow-moat Lamb Weston's Oct. 11 investor day, though we continue to plan a high-single-digit bump to our intrinsic valuation following the firm's first-quarter earnings due to a rosier fiscal 2024 outlook and time value. More concretely, while we believe that the firm's planned investments (as laid out at investor day) should drive an inflection point in sales, higher planned capital spending and selling, general, and administrative expenses largely dilute those impacts—primarily as the firm strives to invest in supporting its capacity expansion. Incorporating the guidance, we now expect those accounts to comprise roughly 9% and 11% of sales in the longer term, respectively, up from the 5%-6% and 9% estimates we've previously contemplated. Still, shares continue to appear overvalued.

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.

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.

We think Lamb Weston, the largest provider of frozen potatoes to North American restaurants, has secured a narrow moat based on cost advantages and entrenched restaurant relationships. The North American commercial potato market is highly concentrated with only four players: Lamb Weston (42%-43% share), McCain (30%), Simplot (20%), and Cavendish (7%-8%). Lamb Weston and Simplot both secure their raw potatoes solely from the Idaho and Columbia Basin region, an area ideally suited for growing potatoes, with very high yields. These firms secure potatoes at a cost 10% to 20% below the average price per pound. There is minimal unused land and water resources in this fertile area, so we expect this advantage to hold for at least the next 10 years. Additionally, as the dominant player, we believe Lamb Weston maintains a scale advantage, which is meaningful given the high fixed costs in this capital-intensive industry. We believe Lamb Weston’s long-standing strategic partnerships with its customers further evidence its competitive edge.

Narrow-moat Lamb Weston posted stellar third-quarter results, delivering sales of $1.25 billion (up 31%), which was driven entirely by price/mix as volumes held flat. The firm raised its full-year outlook to $5.25 billion-$5.35 billion in sales and $4.35-$4.50 in adjusted diluted EPS (from $4.8 billion-$4.9 billion and $3.75-$4.00, respectively), now reflecting the consolidation of the European joint venture in its fourth-quarter results (expected to contribute $300 million-$325 million in sales and $10 million-$15 million in adjusted EBITDA). We plan to edge our near-term forecasts into the guided range, which should lift our $71 fair value estimate by a mid-single-digit rate. Shares currently trade nearly 50% above our existing valuation, and as such, we’d suggest investors refrain from building a position.

We think Lamb Weston, the largest provider of frozen potatoes to North American restaurants, has secured a narrow moat based on cost advantages and entrenched restaurant relationships. The North American commercial potato market is highly concentrated with only four players: Lamb Weston (42%-43% share), McCain (30%), Simplot (20%), and Cavendish (7%-8%). Lamb Weston and Simplot both secure their raw potatoes solely from the Idaho and Columbia Basin region, an area ideally suited for growing potatoes, with very high yields. These firms secure potatoes at a cost 10% to 20% below the average price per pound. There is minimal unused land and water resources in this fertile area, so we expect this advantage to hold for at least the next 10 years. Further, as the dominant player, we believe Lamb Weston maintains a scale advantage, which is meaningful given the high fixed costs in this capital-intensive industry. We believe Lamb Weston’s long-standing strategic partnerships with its customers provide another facet of the firm’s competitive edge.

Narrow-moat Lamb Weston showcased its pricing power in its second quarter (ended Nov. 27) as it delivered 27% sales growth, with a 30% lift from price/mix and only a 3% drag from volume. The top-line strength came despite supply constraints, as well as softer casual dining and full-service restaurant traffic in its foodservice segments (28% of sales). However, fry attachment rate and quick service restaurant traffic remain robust as consumers look for cheaper dining options, spurred by economic turbulence.

Investor angst is always a bit high heading into narrow-moat Lamb Weston’s fiscal first-quarter report, as stakeholders await news on the quality of the new potato crop, which paves the way for either a year of normalized margins or depressed profitability. Thus, investors are breathing a sign of relief (the stock is up by a mid-single-digit rate) on the announcement that the new crop is of average quality, permitting the firm to run processing lines at full speed and meet product specifications in the next year. However, excessive heat caused crop yields to fall short of normal levels, requiring additional potato supply at spot prices, which are above contract rates. The potatoes are being sourced from Lamb Weston’s typical western regions, eliminating the need to ship potatoes from the east, as was required last year. As such, this burden should prove manageable, leading the firm to maintain its fiscal 2023 guidance for $4.7 billion-$4.8 billion in sales and adjusted EPS of $2.45-$2.85, in line with our $4.8 billion and $2.70 marks, respectively. We don’t plan to alter our $70 fair value estimate materially, leaving shares overvalued.

We think Lamb Weston, the largest provider of frozen potatoes to North American restaurants, has secured a narrow moat, based on the firm’s cost advantages and entrenched restaurant relationships. The North American commercial potato market is highly concentrated with only four players: Lamb Weston (42%-43% share), McCain (30%), Simplot (20%), and Cavendish (7%-8%). Lamb Weston and Simplot both secure their raw potatoes solely from the Idaho and Columbia Basin region, an area ideally suited for growing potatoes, with very high yields. These firms secure potatoes at a cost 10% to 20% below the average price per pound. There is minimal unused land and water resources in this fertile area, so we expect this advantage to hold for at least the next 10 years. Further, as the dominant player, we believe Lamb Weston maintains a scale advantage. Given the high fixed costs in this capital-intensive industry, scale benefits are meaningful. We believe that Lamb Weston’s long-standing strategic partnerships with its customers provide another facet of the firm’s competitive edge. French fries are the most profitable food product for restaurants, and a key menu item.

We think Lamb Weston’s ability to wield pricing power in its entrenched restaurant relationships was the primary driver in its record fourth-quarter sales. Net sales growth clocked in at 14%, with 15% from price/mix but negative 1% impact from volume. We aren't discouraged by the slight downdraft in volume given the shipping container shortage (resulting in a 10% drop in export volumes, though better than last quarter’s 20% drop) that prevented the firm from fully satisfying the demand. Quick service restaurant traffic remains resilient (representing 80% of fry servings, per management), though at the expense of softening casual dining and restaurant traffic due to inflationary pressures. In this context, we do not expect a noticeable pullback in QSR demand even with the looming recessionary concerns. Rather, we anticipate the fry attachment rate to hold up in line with the historical levels, aiding Lamb Weston’s top line to grow by mid-single-digit percentages longer-term.

We think Lamb Weston, the largest provider of frozen potatoes to North American restaurants, has secured a narrow moat, based on the firm’s cost advantages and entrenched restaurant relationships. The North American commercial potato market is highly concentrated with only four players: Lamb Weston (42%-43% share), McCain (30%), Simplot (20%), and Cavendish (7%-8%). Lamb Weston and Simplot both secure their raw potatoes solely from the Idaho and Columbia Basin region, an area ideally suited for growing potatoes, with very high yields. These firms secure potatoes at a cost 10% to 20% below the average price per pound. There is minimal unused land and water resources in this fertile area, so we expect this advantage to hold for at least the next 10 years. Further, as the dominant player, we believe Lamb Weston maintains a scale advantage. Given the high fixed costs in this capital-intensive industry, scale benefits are meaningful. We believe that Lamb Weston’s long-standing strategic partnerships with its customers provide another facet of the firm’s competitive edge. French fries are the most profitable food product for restaurants, and a key menu item.