We came across a bullish thesis on Lamb Weston (LW) on Value Don’t Lie’s Substack by Value Don’t Lie. In this article we will summarize the bulls’ thesis on LW. Lamb Weston share was trading at $63.02 as of Sept 9.
Lamb Weston (LW), the leading North American producer of frozen potatoes, has seen its share price fall 55% from its 2023 peak. This drop, from $80 to $53 in just one day in July 2024, has created an opportunity to examine whether the market has overreacted to a company with stable cash flows and a dominant market position. LW primarily supplies French fries to restaurant chains and foodservice distributors, with less than 20% of its FY23 sales coming from retail sales to grocery stores. McDonald’s alone accounted for 14% of LW’s FY24 sales. Globally, LW ranks second in frozen potato production, behind McCain Foods.
The stock’s sharp decline has reset market expectations amid a challenging operating environment. In 4Q24, LW reported a 5% drop in sales, a 40% decline in adjusted EPS, and a 15% fall in adjusted EBITDA. The company’s FY25 guidance continued this trend, projecting flat sales and EBITDA, with EPS down approximately 10%. Management attributes these results to weakening global restaurant traffic and softening frozen potato demand, compounded by an increase in available industry capacity in North America and Europe. These conditions are expected to persist through much of FY25, exacerbated by LW’s own capacity expansion efforts, which have seen capex rise sharply from $290 million to $930 million over three years, with an additional $850 million planned for FY25.
Despite these headwinds, LW’s cash flows remain stable and could improve significantly once capex projects wind down after FY25. Management expects a notable reduction in capital expenditures beginning in FY26, which could see capex intensity fall from over 12% to 9% of sales, potentially freeing up $400 million in annual free cash flow (FCF). This would result in an FCF of $2.78 per share, leaving the stock trading at roughly 23x FCF. Further reductions in capex could boost FCF even more, providing additional upside.
While food and beverage stocks typically enjoy higher multiples due to their stable earnings profiles, LW’s business is more business-to-business (B2B) than consumer-facing, complicating direct comparisons. The big question is whether FY25 guidance has adequately reset expectations or if further downside remains. The restaurant industry is facing declining traffic but is countering with aggressive promotions, which could help LW despite its current challenges. At 9x EBITDA, the shares are not deeply undervalued but could reach $78 at a more normalized 10.5x multiple, suggesting limited downside risk with some potential for upside.
Lamb Weston is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 39 hedge fund portfolios held LW at the end of the second quarter which was 42 in the previous quarter. While we acknowledge the potential of LW as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as LW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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