After A 25% Fall In A Week Is Lamb Weston Stock Undervalued At $80?

LW: Lamb Weston logo
Lamb Weston

Lamb Weston (NYSE:LW), one of the world’s largest producers of frozen French fries, recently reported its Q3’24 results (fiscal ends in May), with revenue and earnings missing the street expectations. The company reported revenue of $1.46 billion and adjusted earnings of $1.20 per share, compared to the consensus estimates of $1.63 billion, and $1.45, respectively. Not only did Lamb Weston miss earnings, it lowered its outlook due to the impact of the transition to a new enterprise resource planning (ERP) system on Q3 results. The downbeat performance and guidance didn’t sit well with the investors, evident from the stock price drop of over 25% in the last five days.

Looking at a slightly longer term, LW stock has seen little change, moving slightly from levels of $80 in early January 2021 to around $80 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. Overall, the performance of LW stock with respect to the index has been quite volatile. Returns for the stock were -20% in 2021, 41% in 2022, and 21% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that LW underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LW face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, LW stock now looks attractive. LW stock trades at 1.8x trailing revenues, much lower than the 3.0x average over the last five years. Our Lamb Weston (LW) Valuation Ratios Comparison dashboard has more details.

Lamb Weston’s revenues were up 16% to $1.46 billion in Q3’24, primarily benefiting from its LW EMEA acquisition.  While the total sales declined 12% in North America, International sales surged 179% y-o-y, primarily due to the acquisition above. Excluding LW EMEA, International sales were down 16% due to the impact of the ERP transition and lower volume, partly offset by a slight improvement in price/mix. In fact, all the decline in North America and over 40% of the decline in the International segment can be attributed to the ERP transition.

The company’s operating margin stood at 18.0% in Q3’24, compared to 21.5% in the prior-year quarter. This fall can be attributed to higher SG&A expenses during the quarter. The earnings of $1.20 on a per share and adjusted basis were down 18% from $1.47 in the prior-year quarter.

Lamb Weston now expects its revenues to be in the range of $6.54 billion and $6.60 billion in fiscal 2024, and earnings to be between $5.50 and $5.65 on a per-share and adjusted basis. This compares with its prior view of $6.8 billion to $7 billion in sales and adjusted EPS of $5.70 to $6.15.

While the Q3 wasn’t rosy for Lamb Weston, the ERP transition issue that plagued its performance was a one-off event, and the company expects business to normalize going forward. As such, a sharp correction of 25% doesn’t look justified. The company’s nine-month sales (ending Feb 2024) of $4.86 billion, reflect a solid 33% y-o-y growth, driven by a robust 18% rise in volumes and 15% price/mix gains. We think that investors can use the current dip in LW stock to enter for solid gains in the long term. If the P/S multiple were to recover to its historical average of around 3x, it will translate into levels of over $130, reflecting gains of about 65% for Lamb Weston (based on trailing twelve months sales of $6.6 billion).

While LW stock looks undervalued, it is helpful to see how Lamb Weston’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Apr 2024
MTD [1]
YTD [1]
Total [2]
 LW Return -27% -28% 106%
 S&P 500 Return -1% 9% 132%
 Trefis Reinforced Value Portfolio -1% 5% 647%

[1] Returns as of 4/9/2024
[2] Cumulative total returns since the end of 2016

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