Lamb Weston Stock Continues to Climb

Published online: Jul 06, 2018
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No matter how you slice, mash or fry it, Lamb Weston Holdings (LW) has been on a tear since going public a year and a half ago.

The Eagle, Idaho-based company has become a top supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers worldwide. By finding new ways to get spuds to the public in new forms, its stock keeps trending higher.

Take last quarter, when the cmpany got a sales boost via Taco Bell's Nacho Fries. Yum Brands (YUM), the fast-food chain's parent company, called the spicy potato fries the most popular debut in Taco Bell's history. Nacho Fries are supposed to be a limited time offer, but could become a permanent menu item, Stifel analyst Christopher Growe said in an April 5 report on Lamb Weston.

"This item provided a volume and likely mix benefit, and we believe that the success of this introduction is likely to keep the item permanently on the Taco Bell menu, furthering the need for even more capacity in the future," Growe said.

Lamb Weston Chief Executive Tom Werner says the company has benefited from strong demand and new product innovation.

"As our strong third quarter and year-to-date results show, our commercial and supply chain teams are executing well and the operating environment continues to be favorable," Werner said on a recent earnings call with analysts.

Expanding Capacity To Handle Demand

Lamb Weston has been expanding its production capacity to handle growing demand for its products.

It recently added a french fry line in Richland, Wash., with an annual capacity of 300 million pounds of potatoes. It has broken ground on another french fry line in Hermiston, Ore., with similar capacity, which it expects to be operational in its fiscal fourth quarter 2019.

Plus, it opened a new facility with an annual capacity of 180 million pounds of potatoes in Russia. Lamb Weston sells products in more than 100 countries and has 24 manufacturing plants around the globe.

The company is focusing on product innovation to drive sales growth. Its current lineup shows a huge assortment of different ways to prepare potatoes. In fries alone, it offers straight, crinkle, curly, waffle and wedge cuts in different sizes, textures and seasonings. There are also potato chips, hash browns, tater tots, cubes, pancakes and varieties of mash.

Keeping Fries Crispy In Transit

Like the scene in "Forrest Gump" where a character lists all the ways you can prepare shrimp, the litany of potato products seems to never end.

In April, Lamb Weston introduced a new product called the Seashore Puff. It's a potato puff seasoned throughout with sea salt, black pepper and garlic.

Earlier this year, it also introduced a way for food delivery services to keep fries hot and crispy in transit. The Crispy on Delivery offering combines product and packaging innovations.

"It's a comprehensive solution that enables fries to stay hot and crispy for the fast growing home delivery channel," CEO Werner said. "It is a promising solution to help customers expand delivery of fries which are typically the highest margin food product on their menus while meeting a clear consumer opportunity."

Crispy on Delivery fries maintain heat and crispiness for 30 minutes, while traditional fries start to lose their appeal after only 5 minutes. The new fry is lightly battered to withstand the challenges of delivery without sacrificing taste, the company said.

Conagra Spinoff

Lamb Weston spun off from Conagra (CAG) in November 2016 and ended its first day of trading at 31.84. Since then, it has formed five bases and broken out of each to run higher.

The stock broke out of a six-week flat base at a buy point of 68.80 on June 26. It trended sideways for several days, but climbed back into the buy zone Thursday with a 2% gain. Lamb Weston shares were up just 0.4% Friday, but that was enough to reach an all-time closing high of 70.19 on the stock market today. Its intraday high was 70.50.

The company trounced sales-and-earnings expectations for the quarter ended Feb. 25 and guided Wall Street higher for the May quarter.

Lamb Weston earned 91 cents a share on sales of $863 million, while analysts expected 77 cents and $814 million. Earnings per share jumped 54% year over year, compared with declines in the previous four quarters. Sales rose 12%, accelerating from single-digit gains in the preceding five quarters.

The company said it expects fiscal 2018 sales to grow at the upper end of the mid-single digit range. It also targeted earnings before interest, taxes, depreciation and amortization, or EBITDA, of $805 million to $810 million. That compares with its prior outlook of $780 million to $790 million.

Fourth-Quarter Expectations

Lamb Weston has not yet set a date for reporting fiscal fourth-quarter results, but that's expected to happen in late July.

Analysts expect the company to earn 62 cents a share on sales of $890 million. That would translate to year-over-year growth of 22% in earnings per share and 7% in revenue.

The company expects a fourth-quarter tail wind from its Grown in Idaho brand retail products. The items have gained distribution with several large new customers, Werner said.

"Over the next few months we will step up marketing investments to support this growth and that of our other brands," Werner said on the recent earnings call, which took place April 5.

Lamb Weston cautioned that it sees increases in agricultural production and transportation costs. That could provide a headwind to growth.

"We continue to believe that we are well positioned to create shareholder value over the long-term by focusing on our strategic and operational objectives," Werner said.