Lamb Weston Continues To Deliver (LW)

When Lamb Weston (NYSE: LW) management increased their dividend by 15% last month investors were surely licking their chops at what would appear in the company’s next earnings report. They didn’t have to wait too long as Lamb Weston released their Q2 earnings last Friday and the results were better than most would have expected. EPS beat expectations comfortably, as did revenue which also registered a 12% year on year increase. Net sales were up 12%, net income increased 18% and diluted EPS was up 28%. On top of these metrics, management raised forward guidance. All in all, a fairly stellar report to start the new year off with.

Though shares had rallied 45% since June, that didn’t stop them jumping over 10% on the news to fresh all-time highs. They’d traded fairly flat since November which is strange considering the increased dividend news that usually drives shares on but perhaps this is indicative of Wall Street believing that shares were fairly and efficiently priced after the run since June.

Friday’s double-digit percentage jump in the stock tells us just how much of an upside surprise the report brought. Tom Werner, CEO of the food processing giant, spoke glowingly about the company’s performance and their future; “in the second quarter, we delivered strong sales, volume and earnings growth across each of our core business segments by continuing to execute well across the organization. We’re also returning more cash to shareholders, including recently raising our quarterly dividend by 15 percent. Because of our strong performance in the first half of fiscal 2020, we have raised our annual outlook for sales growth and EBITDA. We anticipate delivering solid results in the second half of the year, supported by continued favorable restaurant traffic trends.”

After some worrying weather trends in the second half of 2019 dampened the outlook for raw food processors, Lamb Weston had been quick to reiterate and reaffirm their guidance in October. For now, at least they’re delivering on their promises.

Ahead of the Pack

The company is the world’s second-largest producer of frozen potato products; think french fries and hash browns. It was spun out of Conagra Brands (NYSE: CAG) at the end of 2016 and hasn’t been slow in justifying the decision to let it run itself. Shares are up almost 190% in just over 3 years and we all know that demand for french fries isn’t going anywhere.

A 30% downtrend in the stock over a 6 month period starting in November 2018 gave some cause for concern but there was a decent bounce off support at $60 last June and shares haven’t looked back since.

That being said, investors looking to get involved at these all-time highs should keep in mind that RSI is well above 80, indicating overbought conditions. Lamb Weston is also starting to look a little stretched compared to its other food processing peers. However, as Bank of America Merrill Lynch noted in May, Lamb Weston’s fundamentals such as EPS growth are also better than most of their peers. Consider this, in the 3 years and 2 months since the company IPO’d, Lamb Weston shares have tacked on a full 175% in value. However, consumer staple giants like Kraft (NASDAQ: KHC) and former parent Conagra Brands (NYSE: CAG) are actually down 65% and 9% respectively. 

Getting Involved

To be sure, any short term pullback or period of profit-taking in shares of Lamb Weston will likely be viewed as a buying opportunity and rightly so. All the signs point to the internal momentum being real enough to justify continued upward movement in the shares. It’s been a couple of months since there were any fresh ratings on the stock. Watch for these to start flowing in and be ready to capitalize on the boost to the momentum that they bring.