Opinions
The Panic-Proof Portfolio (Stockchase Research)
Lamb Weston
LW-N
TOP PICK
Apr 04, 2024
Stock price when the opinion was issued
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LW produces and distributes frozen potato products globally and is now trading at 18.4x times' Forward P/E. In the last few years, LW’s revenue grew at a healthy double-digit rate. The balance sheet is leveraged, with a net debt of $3.3B, net debt/EBITDA is around 2.9x. The company has been reinvesting quite heavily to grow organically over the last few years. The debt adds risk, but considering the business it is probably at a manageable level. We would not like to see it increase, though. LW also pays consistently increasing dividends, which we like. Overall, a solid consumer staple name, debt is high, but the business is quite stable to support the leverage, ROE (113%!) is a bit inaccurate metric to use here, we prefer to use Return on total capital (26.7%) (debt + equity), we think that metrics reflect the return of the underlying business more accurately.
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We reiterate LW, North America's leading supplied of fries to McDonalds, as a TOP PICK. Revenue is up over 12% over the year, EPS growth over the past three years has averaged 23% annually and supports a ROE of 88%. The company is prudently using some cash reserves to retire debt. We recommend trailing up the stop (from $69) to $76, looking to achieve $109 -- upside potential of 28%.
(Analysts’ price target is $108.62)Our PAST TOP PICK with LW has triggered its stop at $76. To remain disciplined, we recommend covering the position at this time. When combined with our previous recommendations, this will result in a net investment loss of 8%.
LW reported misses on both top and bottom lines, revenue came at $1.61B compared to the consensus estimate of $1.71B, While EPS came at $0.78 missing the expectation of $1.26. Management also gave out weak guidance for FY2025 growth in the range of 3%-5%. The recent weakness management mentioned is largely due to restaurants raising menu prices, which can negatively affect consumer demand.
LW operates in a stable industry, but the recent earnings and guidance have been concerning, momentum in LW has also been poor, and it could take quite some time before LW starts to recover. We would not be in a rush here to add but wait until there is a clear sign of a recovery in place and better stock momentum
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They just reported their second heinous quarter in a row. Shares fell 30% the past week and 48% this year. It used to be a top packaged food company. Trouble began a year ago with the new weight-loss drugs taking off, so it impacted LW's french fries and other fast-potato foods. Their April report was a disaster and now earnings are down 40% year over year. That said, this is an opportunity. It trades at 12.5x forward PE. The great potato gut will come to an end eventually.
LW provides french fries and other potato products to over 100 countries and McDonald's is their largest customer. Recently reported earnings negatively surprised analysts as a transition to a new internal planning system did not go smoothly -- resulting in $135 million decline in sales. This is very likely temporary and provides a good buying opportunity. It trades at 16x earnings and supports a robust ROE. Its modest dividend is backed by a payout ratio under 20% of cash flow. We recommend setting a stop-loss at $69, looking to achieve $129 -- upside potential of 57%. Yield 1.1%
(Analysts’ price target is $129.34)