Lamb Weston or Conagra Brands: Which is the better buy?

Key Points

• The Consumer Staples sector offers value and yields for risk-averse investors. 
• Conagra is a solid and high-yield play, but there are better plays. 
• Lamb Weston isn't cheap, but it provides value and growth. 

Investors looking for value and yield have no further to look than the Consumer Staples sector. The sector corrected sharply in the second half of 2023 and now, even after rebounding smartly, provides a value relative to historical norms and the pandemic bubble. The takeaway is that the sector as a whole is buyable, but individual stocks within the group may provide the better play. Using Lamb Weston NYSE: LW and Conagra Brands NYSE: CAG as examples, both recently reported for FQ2/CQ4; one is cheap, and the other provides value.

Conagra is cheap; Lamb Weston provides value

Looking at these stocks from the valuation perspective, Conagra appears to be the better buy, but don’t confuse cheapness for value. Trading at 11X earnings, it is much cheaper than Lamb Weston, which trades closer to 17X. The difference is that, while both companies produced solid results, Lamb Weston is growing and guiding for growth while Conagra continues floundering. 

Lamb Weston grew its business by 36% in Q2 compared to a contraction for Conagra. Lamb Weston also outperformed its consensus estimates, while Conagra fell short. The shortfall is marginal but evidence of momentum that Conagra doesn’t have. 

Likewise, the margin and bottom line details favor both companies, but Lamb Weston outperforms. Conagra produced $0.71 in adjusted earnings to outpace the Marketbeat.com consensus forecast by $0.03, but earnings are down compared to last year, and margin is down. On the other hand, Lamb Weston outpaced the consensus forecast by $0.03 while growing its earnings. Strength is also seen in the guidance and the analysts forecast for 2025, a significant factor for stock performance. 

Guidance is further evidence of Lamb Weston’s value. Where Conagra lowered its guidance for FY revenue to a range of down 1% to 2%, with EPS below the analysts' consensus, Lamb Weston is raising. Lamb Weston reiterated its revenue target, which brackets the consensus nicely while raising its outlook for earnings. The new target for earnings also brackets the consensus, leaving ample room for outperformance. 

Lamb Weston has superior capital returns, analysts agree

Lamb Weston’s dividend yield is less than Conagra’s; however, Lamb Weston increased its payment with the Q2 release, up 29%, and aggressive increases can be expected in future years. Lamb Weston pays less than 25% of its earnings compared to nearly 50% for Conagra while growing its distribution more robustly. Conagra is increasing its payment at a tepid 5% pace. Lamb Weston also made $500 million in share repurchases compared to $0 for Conagra during the quarter. 

The analysts' activity tells the same story: Lamb Weston is the better buy. Analysts rate Conagra at Hold compared to the Moderate Buy for Lamb Weston, and there is another valuation angle to consider. Conagra has 13% upside potential at its consensus target but is well above the low end of the analysts' range. Lamb Weston has closer to 20% at its midpoint; its midpoint is up compared to last year and stable, and the stock trades well below the low end of the range. 

Lamb Weston moves higher following Q2 results

Both stocks are active following the Q2 results, but LW is moving up and CAG down. LW shares opened with a gain near 2% to confirm support at the short-term moving average. Assuming the market follows through on this signal, the stock should continue up and into the analysts' target range. CAG shares opened higher but quickly sold off to confirm resistance at the 150-day moving average. If it doesn’t regain traction soon, it is in danger of retreating toward the bottom of its recent range.