Back to top

Bull of the Day: Lamb Weston Holdings, Inc. (LW)

Read MoreHide Full Article

Today we dig into a stock that has not only surged in 2023 alongside much of the market, but also posted a fantastic 2022. 

Lamb Weston Holdings, Inc. (LW - Free Report) ) runs a straightforward frozen potatoes business that’s booming and should do well if the U.S. economy keeps humming or slips into a recession.

The ecstatic start to 2023 has investors diving head first back into beaten-down technology stocks on the hopes that the U.S. economy is headed for a goldilocks zone. Even if Wall Street is right and the Fed’s war on inflation is all but won without causing a recession and the earnings outlook won’t get any worse, growth stocks that rebounded could be in for a pullback of some sort.

Meet a Potato Company

Lamb Weston, which spun off from ConAgra Foods, Inc. (CAG) in the fall of 2016, is one of the largest suppliers of frozen potatoes in the world, selling a nearly endless array of potato-based offerings. LW makes everything from classic fries to sweet potatoes waffle fries and everything imaginable in between. The company also sells potato chips, hash browns, mashed potatoes, and beyond, alongside some frozen vegetable

Lamb Weston sells its frozen potato products to restaurants and retailers around the world. LW’s growth has been rather impressive outside of its small covid-based downturn.

Simply put, fries, potatoes, and potato-based foods are core menu offerings at restaurants across the U.S. and internationally, as well as household staples.

It is far from a flashy business, but Lamb Weston plays a crucial role in providing one of the most popular food items out there right now and for years to come. The company also has tons of pricing power, which we will see shortly.

Zacks Investment Research
Image Source: Zacks Investment Research

Recent Growth and Outlook

Lamb Weston topped our Q2 FY23 earnings and revenue estimate at the start of January.

LW’s revenue soared by 27% YoY to $1.28 billion even though its volume dipped by 3%, primarily “reflecting an inability to fully serve customer demand” in LW’s foodservice and retail channels. Lamb Weston cited supply chain issues, commodities shortages, and other reasons for the slowing volume. Volumes fell last quarter as well.

Even though volumes dipped, Lamb Weston flexed its pricing power, as well as the resiliency and essential aspect of its business by raising its price/mix by 30%. Meanwhile, its adjusted earnings skyrocketed 172% to $1.28 per share to crush our bottom-line estimate by 73%.

LW has now topped the Zacks consensus estimate by an average of 53% in the trailing four quarters. Despite large-scale macroeconomic setbacks, Lamb Weston executives boosted their outlook, which is no easy task at the moment.

Zacks estimates call for Lamb Weston’s revenue to climb 20% in its fiscal 2023 (period ending in May 2023) to hit $4.90 billion and then surge another 16% in FY24 to reach $5.67 billion. This would follow 12% revenue growth in fiscal 2022.

Lamb Weston is projected to nearly double its adjusted earnings in FY23, with it set to climb 90% this year and another 13% next year to reach $4.47 per share (vs. $2.08 per share in FY22). The company’s strong showing combined with its improved outlook forced analysts to once again boost their EPS estimates.

Lamb Weston’s consensus Q3 earnings outlook is up 34% since its release, with Q4 up 21%. Meanwhile, its adjusted fiscal 2023 EPS estimate is up 31% and FY24 has jumped 15%. The recent positivity is part of a longer-term uptrend for LW’s earnings outlook and it helps LW capture a Zacks Rank #1 (Strong Buy) right now.

Zacks Investment Research
Image Source: Zacks Investment Research

Other Fundamentals

Lamb Weston stock has jumped around 230% since it went public in late 2016 to destroy its industry’s 2% run during this stretch, as well as the S&P 500’s 97% and the Zacks Consumer Staples sector’s 8%.

LW shares have soared over 50% in the past 12 months vs. the S&P 500’s 9% fall and its industry’s 1% dip. This run includes a 19% jump in the trailing three months and a big post-Q2 release spike at the start of January that has it up 11% YTD.

Even though it’s gone on such a solid run, LW still trades 7% beneath its average Zacks price target at around $99 per share. And despite the climb, Lamb Weston stock is not overbought (70 or higher) when it comes to RSI levels, hovering at around 59 at the moment.

On the valuation front, Lamb Weston shares trade at 22.9X forward earnings, which is below its own five-year median and 27% under its highs during this timeframe. The stock does trade at a premium compared to Zacks Consumer Staples sector, but LW has crushed this group of stocks during the past five years (82% vs. 2%).

Lamb Weston pays a dividend that currently yields 1.1% and it has roughly $240 million authorized for share repurchases under its existing program. On top of that, four out of the five brokerage recommendations Zacks has are “Strong Buys.”

Zacks Investment Research
Image Source: Zacks Investment Research

Bottom Line

Lamb Weston is set to benefit from its stature as a key provider of consumer and restaurant staples.

LW shares might be able to maintain their momentum given Lamb Weston’s valuation levels and impressive growth outlook, especially compared to the beaten-down growth stocks that have skyrocketed to start 2023.

Lamb Weston offers investors both near-term and long-term upside potential and could play a nice part within a diversified portfolio because everyone needs some potatoes to go along with their meat. 

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

Lamb Weston (LW) - free report >>

Published in