Lamb Weston's Dividend, Upside Are No Small Potatoes

Key Points

• For the three months ended August 27th, Lamb Weston's adjusted EPS more than doubled to $1.63, smashing Wall Street’s $1.08 estimate.
• The company's exposure to food retailers makes it a defensive consumer staple name built to perform throughout the economic cycle.
• Analysts' average target of $128.50 implies nearly 40% total return potential over the next 12 months when combined with the $0.28 per share quarterly dividend.

That bag of French fries in the freezer? Odds are it came from Lamb Weston Holdings, Inc. NYSE: LW. 

That’s because the Idaho-based company is one of the world’s top suppliers of frozen potatoes and vegetables. Its products are found at grocery stores and restaurants in more than 100 countries. Crinkle cut fries, sweet potatoes, tater tots, mashed potatoes — you name it. 

Now, a potato business probably doesn’t come to mind when you think of growth investments. But maybe it should. Lamb Weston has been on a tear. 

From March 2022 to July 2023, the stock ran as much as 136%. It has finally pulled back in recent months. This may be an opportunity — especially considering the company’s latest earnings report.

For the three months ended August 27th (fiscal 2024 Q1), sales were up 48% year-over-year to nearly $1.7 billion. International sales surged 212% primarily due to the acquisition of the company’s remaining equity interest in Lamb Weston EMEA. Thanks to solid demand and price hikes, adjusted earnings per share (EPS) more than doubled to $1.63, making a smashed potato out of Wall Street’s $1.08 estimate. 

The stock gapped up 8% on the October 5th report and was easily the S&P 500’s top daily performer. Two days later, an apparent bout of profit taking has wiped out the gain.

What Is the Growth Outlook for Lamb Weston?

While it's big on product innovation, Lamb Weston will never be mistaken for a high growth stock. In fact, it's the opposite. Its exposure to food retailers makes it a defensive consumer staple name built to perform throughout the economic cycle. Given the current inflation and rate headwinds, market outperformance reminiscent of 2022 may lie ahead.

On October 11th, Lamb Weston hosts its annual Investor Day where it will share its strategic priorities. After raising its full-year financial outlook last week, management is likely to forecast some extra crispy financials.

Amid healthy demand, pricing and potato crop trends, the company boosted its fiscal 2024 diluted EPS target to $5.47 to $5.92. At the midpoint, this gives the stock a FY24 P/E ratio of 16x. This is towards the low end of the valuation range (10x to 38x) for the dozen S&P 500 packaged food stocks.

A key part of the longer-term growth story is Lamb Weston’s expansion in Asia. It added a manufacturing facility in China which is expected to open later this month. Since China accounts for approximately 18% of the world population, a bigger presence in the country should lead to stronger growth.  

What Is Lamb Weston’s Total Return Potential?

For starters, Lamb Weston has an active share repurchase program. Last quarter, it bought back nearly one million shares at an average price of $100.77. This signals that the leadership team believes the stock is now undervalued after the pullback from $117.38.    

The company’s shareholder-friendly status also shows in the form of a $0.28 per share quarterly dividend. The dividend has been increased for three straight years and, based on the low earning payout ratio (18%), there is a lot of room for dividend growth. Considering the 1.2% yield is below the sector average, this would help attract value investors to the stock.

Following the Q1 earnings release, Wall Street has maintained its unanimously bullish stance on Lamb Weston. Four firms reiterated their buy ratings last week and issued price targets ranging from $125 to $132. Their average target of $128.50 implies nearly 40% total return potential over the next 12 months when you toss in the dividend.

So the next time you lather up your waffle fries with your favorite dipping sauce, think about the dip in Lamb Weston. Given the company’s market position and growth prospects, the stock appears destined to ‘ketchup.’