About Lamb Weston
At MacroHint, we like to tell ourselves that we know a thing or two about the micro and macroeconomy, numbers and the 30,000-foot view of the world and where it’s headed and how we can ultimately capitalize financially on relevant trends.
On the other hand, Lamb Weston knows potatoes.
From potatoes in the rawest firm to the salt infatuated, greasy fries that McDonald’s employees hand you in the drive-thru at the last window, Lamb Weston indisputably knows potatoes.
Given that some of the company’s more high-profile clientele includes the likes of restaurant and fast-food titans, McDonald’s and Chick-fil-A, we think it is safe to assume these aren’t the company’s only customers.
Although Lamb Weston is a major player in the potato space, it definitely does have its work cut out for itself as some of its competitors include Kraft Heinz, PepsiCo and the J.R. Simplot Company, just to name a few.
One of the good questions to be asked in today’s market environment is whether or not a company will fare well during a deep and dark recession. If not, it doesn’t necessarily mean that it’s not worthy of a spot in your investment portfolio, however the timing might not be right or make sense and it would likely be more fruitful to put money into a company with an unalloyed track record of performing well or as usual during a recession or during periods of other external negative supply shocks, as may be the case in the potato industry in the past.
Prior to initially devising this article, we had heard of Lamb Weston through the grapevine and upon further research, came to the general conclusion that the company is recession resistant, if not nearly recession proof.
No matter how bad the economy performs or how tight consumers’ budgets get, we think people will tend to inch towards fast-food, especially more affluent consumers as they are trading down as they will also be more inclined to shop at more value-oriented retail establishments like Walmart, which happens to have a large assortment of Lamb Weston’s potato-focused products.
These are some of the many recession resistant venues through which the company can still generate revenue through the sale of its products.
As long as consumers need to eat, whether it means getting a meal from the nearby Chick-fil-A or going to the local grocery store to pick up a few items, Lamb Weston is likely to benefit.
Now that we’ve given our two cents, let’s be responsible, objective investors and let the numbers tell their side of the story.
Lamb Weston’s stock financials
After recently crushing earnings (in a resoundingly good way), Lamb Weston’s stock price has spiked up to nearly $98 per share, reaching a new all-time high.
Even though this might invoke a lot of excitement and confidence in investors looking to get on the Lamb Weston train, we at MacroHint politely disagree, at least, at first glance.
Don’t get us wrong, we’re sure it has been a jolly good time for those who have been investing in Lamb Weston’s stock for the last handful of years (and months for that matter), however, as we have seen in previous stock analysis articles, this doesn’t create the most attractive buying opportunities for those not already on the train.
It’s never a great idea to buy at the top and sell at the bottom.
Nevertheless, in trying to better decipher whether or not the company’s stock is trading at fair value or overvalued despite its strong recent share price run-up, let’s defer to its stock’s price-to-earnings (P/E) ratio.
With a current P/E ratio of 29.74, it is clear that shares in Lamb Weston’s stock are trading at a value higher than what they are actually worth paying for, or in other words, are overvalued relative to its intrinsic value.
This makes sense as the company is coming off of a strong quarterly earnings call tied with the fact that its stock is up nearly 47% over the last year’s span of time, which in itself supports our claim that Lamb Weston’s stock is recession resistant.
Nevertheless, it still doesn’t make Lamb Weston (NYSE: LW) a value stock.
Before diving into the company’s financial statements, we’d like to also briefly add that the company presently issues an annual dividend of $1.12 to its shareholders, which is just an added bonus when holding shares in this company.
As it relates to Lamb Weston’s balance sheet, the company is thankfully total asset-heavy as its executive team is in charge of approximately $4.1 billion in total assets as well as around $3.8 billion in total liabilities.
Although the company’s amount of total liabilities come up just short of its total assets, it can definitely be gathered that Lamb Weston has likely been subjected to many added costs, both internal and external. For instance, labor costs across the country have risen along with operating expenses and other associated costs due to mounting inflationary and currency headwinds.
However, one should understand that one of the benefits of being a leader and massive supplier in the food and food services industries is pricing power, which the company’s executive team has more than likely had to flex a little bit in the past handful of years in order to maintain solid profit margins.
All things considered, expenses are up and Lamb Weston is a company that is rather susceptible to supply chain disruptions and other previously mentioned headwinds so we are simply glad that it’s managed to tame its total liabilities to a lesser amount than that of its total assets over the last few years and given its pricing power and prominent share of the potato market, we’re not expecting any insurmountable balance sheet-related issues in the near, intermediate or long-term.
According to the company’s income statement, Lamb Weston’s revenue has been unexciting and predictable, which isn’t exactly a negative, particularly in this current market setting.
Specifically, the company’s total revenue has stayed in the range of around $3.4 billion and approximately $4.1 billion over the past five years.
This makes sense given that Lamb Weston’s executive team has likely established contracts that are relatively long-term by nature paired with the high likelihood that the major entities it supplies are satisfied with the company’s products and pricing.
Regardless of reason, we hoped for consistency with Lamb Weston (in terms of total revenue) and we’re sure glad we got it.
Onto the company’s cash flow statement, Lamb Weston’s net income over the last five years has remained positive, ranging between $201 million (2022) and $487 million (2019). In addition to the company’s strong, positive and somewhat consistent net income, Lamb Weston’s management team has also successfully extracted nearly half of a billion dollars in total cash from operations during the same time frame (some years slightly lower, some years slightly higher), which is no easy task in itself.
Lamb Weston’s stock fundamentals
Evidently so, sometimes it pays to dominate nearly an entire quarter of the potato market.
One of the luxuries that comes with that sort of market share is the ability to turn a higher trailing twelve month (TTM) net profit margin than the rest of the competition, or at least their TTM net profit margin averages.
At least, this most certainly is the case with Lamb Weston.
For instance, the company’s TTM net profit margin currently sits at 9.61% to the industry’s average of -3.28%.
As investors looking to put some investable funds behind a comparatively profitable company as well as one that seemingly has quite a sizable moat, Lamb Weston doesn’t seem to be a terrible choice by any stretch.
Lastly, according to the company’s core return metrics, the company’s TTM returns on assets and investment are both higher than that of the competition’s average which to us indicates that Lamb Weston is still finding ways to get meaningful usage (and subsequently, returns) out of its equipment and brand overall, which is another sign that this company is able to perform well during recessionary periods.
Should you buy Lamb Weston stock?
The biggest sticking point that we have with this company and its stock is something that is largely out of its executive team’s direct control; stock price valuation.
Although one could credibly argue that during times of emerging and current economic uncertainty, it is worth paying a premium for a quality, recession resistant company’s stock, we at MacroHint aren’t too keen on buying an established company’s stock at these current valuation levels, as we feel that we would simply be overpaying. However, if Lamb Weston’s stock were to take a tumble in the coming weeks, months or even years, we would definitely be ready to pounce at the opportunity to invest in the company at more reasonable price levels.
Overall, we give the company’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.