Lamb Weston Boasts Solid Sales and Profit Gains

Narrow-moat Lamb Weston LW 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.

Lamb Weston expanded its adjusted gross and operating margins by 950 and 790 basis points to 31.7% and 19.2%, respectively, despite the rash of challenges plaguing the business (double-digit cost inflation and a poor-quality potato crop that increased contract prices by 20%). We attribute these marks to pricing actions and Lamb Weston’s prudent approach to prioritize higher-margin businesses (retail, premium, and batter-coated products) amid supply constraints, while expanding its manufacturing footprint in Idaho, China, Argentina, and the Netherlands (expected to become available over the next few years) to meet growing demand and increase fill rates.

Against this backdrop, in its food-service segment (29% of sales), volume dropped 3% as increased quick service restaurant traffic was more than offset by softer traffic in casual dining and full-service restaurant (with consumers opting for cheaper dining options). Still, we expect the fry attachment rate to hold up as french fries have historically proved to be downturn-resilient. We maintain our long-term outlook for mid-single-digit average top-line growth and high-teens operating margins through fiscal 2032.