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Lamb Weston (LW) Gains 25% in 3 Months: Will It Continue?

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Lamb Weston Holdings, Inc. LW is gaining on strategic growth efforts like boosting offerings and expanding capacity. The company has been benefiting from robust demand in the food away-from-home channels. In addition, its efficient price/mix is yielding well. Thanks to such upsides, Lamb Weston’s stock has gained 25.9% in the past three months compared with the industry’s growth of 6.1%.

Let’s delve deeper.

Away-From-Home Demand Solid

Lamb Weston is gaining from strong demand for away-from-home frozen potato products. Such trends contributed to the top line in second-quarter fiscal 2022, wherein net sales amounted to $1,007 million, up 12% year over year. Volume increased 6%, driven by the ongoing recovery in demand for frozen potato products in its restaurant and foodservice channels across North America.

Speaking of segments, volumes rose 4% in the Global unit, driven by solid growth in shipments to restaurant chain customers across the United States. Foodservice volumes increased 22%, driven by the solid demand at small and regional chain restaurants combined with independently owned restaurants. For fiscal 2022, management expects net sales growth to exceed its long-term goal of low to mid-single digits.

Zacks Investment Research
Zacks Investment Research

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Other Drivers

Lamb Weston’s top line has been benefiting from a robust price/mix, as witnessed in the second quarter of fiscal 2022. In the quarter, price/mix went up 6% on the back of initial benefits from product pricing actions along with better prices charged to customers for product delivery.

For the second half of fiscal 2022, the company expects net sales growth to be mainly driven by price/mix. For the fiscal third quarter, management anticipates the price mix to improve sequentially, owing to benefits from the earlier announced product pricing actions in its core segments.

Lamb Weston’s sturdy balance sheet and capacity to generate cash keep it well-placed to boost production capacity and fuel long-term growth. In July 2021, the company announced the expansion plan of french fry processing capacity at its existing American Falls, ID-based facility, with an envisioned capacity to manufacture more than 350 million pounds of frozen french fries and other potato products annually.

The company earlier highlighted that the construction would be finished by the middle of 2023. In March 2021, the company unveiled plans to build a french fry processing facility in Ulanqab, Inner Mongolia, China. The construction of the facility was anticipated to be concluded in the first half of fiscal 2024.

Lamb Weston’s efforts to boost offerings and expand capacity enable it to effectively meet rising demand conditions for snacks and fries. Apart from this, the company is continuing with investments to boost supply-chain, commercial and information technology operations. In the fiscal second quarter, capital expenditure (including IT expenditure) amounted to $148.1 million. For fiscal 2022, the company expects $450 million cash to be used for capital expenditure (excluding buyouts).

Cost Hurdles

Lamb Weston has been seeing escalated costs for a while. In second-quarter fiscal 2022, gross profit declined $18 million to $205.5 million, led by increased manufacturing and distribution costs on a per-pound basis. Increased costs per pound reflect double-digit cost inflation from key inputs, mainly edible oils, ingredients like grains and starches, transportation and packaging. Adverse impacts of labor shortages on production run-rates and reduced raw potato utilization rates also led to increased costs per pound.

Net income and adjusted EBITDA (including unconsolidated joint ventures) are likely to be under pressure for the rest of fiscal 2022, as it continues to navigate through major inflation for key production inputs, transportation and packaging compared with the fiscal 2021 levels.

Also, industry-wide operational challenges like labor shortages, upstream and downstream supply-chain disruptions might be concerning. The company also expects raw potato costs on a per-pound basis to increase through the year. Apart from this, growth in sales volumes might be hampered by the disruptions in production and logistics networks along with the impacts of COVID-19 variants on restaurant traffic and consumer demand.

The aforementioned upsides are likely to help the Zacks Rank #3 (Hold) company stay afloat amid such hurdles. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hot Consumer Staples Bets

Some better-ranked stocks are Flower Foods FLO, United Natural Foods UNFI and Sanderson Farms, Inc. SAFM.

Flower Foods, the producer of packaged bakery foods in the United States, currently sports a Zacks Rank #1. Shares of FLO have gained 10.9% in the past three months.

The Zacks Consensus Estimate for Flower Foods’ 2022 sales suggests growth of 1.9% from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of 15.4%, on average.

Sanderson Farms, the producer of fresh, frozen and minimally prepared chicken, currently sports a Zacks Rank #1. Shares of SAFM have risen 0.7% in the past three months.

The Zacks Consensus Estimate for Sanderson Farms’ current financial year’s earnings per share (EPS) suggests significant growth from the year-ago reported figure. SAFM has a trailing four-quarter earnings surprise of 496.3%, on average.

United Natural Foods, the leading distributor of natural, organic and specialty food and non-food products in the United States and Canada, carries a Zacks Rank #2 (Buy) at present. Shares of UNFI have moved down 1.4% in the past three months.

The Zacks Consensus Estimate for United Natural Foods’ current financial year’s EPS suggests growth of 7.7% from the year-ago reported number. UNFI has a trailing four-quarter earnings surprise of 35.4%, on average.

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United Natural Foods, Inc. (UNFI) : Free Stock Analysis Report

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Lamb Weston (LW) : Free Stock Analysis Report

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