Silence of the Lambs - Lamb Weston - LW
When a relatively under-leveraged french fry maker falls 50% in four months, you have to stop and investigate. Good value investors spend time gawking at “financial accidents”
Lamb Weston - LW - $55 was a spin-off from ConAgra in 2017. Since the spin earnings have grown steadily from $2.50 to $5.00. But LW missed the last two quarters, and guided to a flat to down 2025. LW has a May year end, so once again the “dead money” issue pops up. It will an entire year before we get 2026 guidance.
LW had convinced Wall Street it was a predictable “semi-growth stock”. These days semi-growth means promising high single digit growth. Actually LW is in a commodity business that will have ups and downs. Just a year ago LW was turning away business, and now they have too much capacity. LW went on a capital spending spree, just before QSR restaurant unit sales slowed roughly 5% in early 2024.
The positive is that after two misses, you would hope the estimate for May 2025 is conservative. This puts the stock at 10-12x a “bottom of the cycle” earnings forecast. There are currently 9 buys and 4 hold/sells, but you can bet the weasels/analysts will be pulling their buys over the next six months. The balance has debt less than 3x EBITDA, and free cash flow will be significant in 2026.
Am I ready to step up? Here are a few things slowing me down:
The two major competitors are private companies, McCain Foods and JR Simplot. This can make it a little tricky to figure out industry dynamics.
70% of sales are fast food hamburger related, and 30% are more casual dining. Maybe fast food burgers have reached their limit? I doubt it, but it is a possible concern.
This is old management from ConAgra. They might be in a little over their heads. The last conference call was pretty poor.
There was a $50 million new product recall in the quarter based on “product integrity”. The customer is reordering basic fries from LW again, but there is no clear story what happened. Maybe this was a one-time occurrence, but better disclosure would make things easier.
There was also business lost to a “ERP system changeover”. This is another frustrating excuse that is difficult to evaluate.
Management could have timed timed share buybacks a little better.
The guys at ConAgra are not idiots, they probably spun LW because they knew more capital expenditures were needed.
This will an interesting stock to watch when tax loss selling season starts this Fall.
None of my value guys own LW so far, let’s watch for any new holders.
Cyclical companies are tough to judge in normal times, but throw in a global pandemic and things get more confusing.
LW is clearly a Top 40 watch and monitor idea, but let’s be cautious not to have too much “dead money” in the model portfolio.