Global frozen French fry producer, Lamb Weston, disappointed investors with its Q3’24 results, reporting lower-than-expected revenue of $1.46 billion and adjusted earnings of $1.20 per share, leading to a stock price drop of over 25% in the last five days. The company attributed the miss to the impact of transitioning to a new enterprise resource planning system. Looking at the stock’s performance over the past three years, it has been volatile, with returns of -20% in 2021, 41% in 2022, and 21% in 2023, underperforming the S&P 500 in 2021 and 2023.
Beating the S&P 500 consistently has been challenging for individual stocks in recent years, including heavyweights in the Consumer Staples sector and megacap stars. However, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year. With the current uncertain macroeconomic environment, including high oil prices and elevated interest rates, the question remains whether Lamb Weston will underperform the S&P over the next year or see a strong jump. From a valuation perspective, the stock now appears attractive, trading at 1.8x trailing revenues, lower than the 3.0x average over the last five years.
Lamb Weston’s revenues in Q3’24 were up 16% to $1.46 billion, driven by its LW EMEA acquisition. While North American sales declined 12%, International sales surged 179%, mainly due to the acquisition. Excluding LW EMEA, International sales were down 16% due to the ERP transition and lower volume. The company’s operating margin dropped to 18.0% from 21.5% in the prior-year quarter, attributed to higher SG&A expenses. Earnings of $1.20 per share on an adjusted basis were down 18% from $1.47 in the previous year.
Lamb Weston’s outlook for fiscal 2024 is adjusted to revenues between $6.54 billion and $6.60 billion, and earnings per share between $5.50 and $5.65, lower than the prior view of $6.8 billion in sales and adjusted EPS of $5.70 to $6.15. Despite the challenges faced in Q3, the company believes the ERP transition issue was a one-off event, and business is expected to normalize going forward. With solid nine-month sales growth of 33% y-o-y, investors may find the current dip in LW stock as an opportunity for long-term gains, with potential to recover to levels over $130.
While Lamb Weston appears undervalued, it’s essential to compare how the company’s peers fare on important metrics. Investors can utilize Peer Comparisons to gain valuable insights into other companies across industries. Overall, despite the recent setback, Lamb Weston remains optimistic about its future performance and expects to benefit from a recovery in the coming periods.
