The New Potato Crop Should Not Derail Lamb Weston’s Margin Recovery, but Shares Appear Overvalued

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.