Lamb Weston And The French Fry Recovery
As hard as it may be to look past the pandemic the major theme of 2021 is going to be the reopening. The vaccines are already in production and their use is widening every day. We’ve still got a solid quarter or two to go before we can start talking seriously about a full recovery but that talk is on the horizon. In that light, seeking out some of the better plays for the reopening is a good idea and Lamb Weston (NYSE:LW) is one of them.
Lamb Weston is the king of potatoes and would have been a pantry-loading stay-at-home hit if not for one thing. About 85% of its pre-pandemic revenue came from food-away-from-home spending and that is the hardest hit vertical of the entire food industry. Thank about all those french fries, hash browns, and mashed potatoes that aren't getting used by all those restaurants we used to frequent so often. When the broad reopening begins food-away-from-home is going to be one of the primary beneficiaries because, let’s face it, we’re all ready to get out of the house.
The Analysts Are On The Fence About Lamb Weston
The analyst’s community at large is still on the fence about Lamb Weston but the sentiment has been warming. Over the last 90 days, the consensus rating has shifted from a firm neutral/hold to neutral with a bullish bias and there has been a significant increase in the consensus price target to go with it. The consensus target is up more than $11 or about 20% in that time and it is still lagging the price action.
Price action in shares of Lamb Weston got juiced in early December when J.P. Morgan analysts upgraded the stock to Overweight from Neutral and set a price target of $89. The $89 price target set by J.P. Morgan is the Wall Street high and implies an upside of 18.67%. The most recent rating to come out before J.P. Morgan is from Bank Of America. Bank of America maintained its neutral rating but raised its price target by $5 to $75. J.P. Morgan analyst Ken Goldman said:
"We remain comfortable with the longer-term growth prospect of the french fry category and LW’s position within it, especially when considering that (a) LW’s weekly branded retail takeaway growth has not fallen below 30% since early March, and (b) even during an unprecedented decline in food away-from-home demand, LW seemingly has not made meaningful price concessions.”
Regarding the company’s growth outlook, the calendar Q4/fiscal Q2 revenue is expected to grow marginally on a sequential basis but hold steady near -12% on a YOY basis. Beyond that, the outlook for 2021 brightens with the return of YOY growth and results that will surpass both 2018 and 2019’s revenue.
Highly Valued Lamb Weston Is Worth The Money
Lamb Weston is highly valued trading at 32X this year’s earnings and 25X next year’s but there is a mitigating factor. Not only is the company on track to grow from its pre-COVID levels but the CAGR should run in the high-teens to low-20% range for EPS over the next several years. Add to that a relatively safe 1.25% yield and the value becomes even more apparent. The company is carrying a bit of debt that has its coverage and leverage ratios a bit off but that is offset by a large cash position. A cash position that was built-up to help carry the company (unnecessarily I might add) through the pandemic.
The Technical Outlook: Earnings May Spark A Buying Opportunity
Lamb Weston is slated to report earnings on Thursday and the report could spark a buying opportunity. The stock is trading up near the post-correction high and facing some resistance. If the resistance confirms in the wake of the report price action will likely move down to retest the $70 level and possibly lower. If, however, the company reports better than expected and provides any kind of optimistic outlook or commentary a move to new highs is likely. Resistance is at the $80 level. A move above that level with a close would be bullish.
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