Lamb Weston: Judicious Investments Set to Support Category Leadership Position but Shares Rich

We don’t plan any incremental change to our $74 fair value estimate following narrow-moat Lamb Weston’s LW Oct. 11 investor day, though we continue to plan a high-single-digit bump to our intrinsic valuation following the firm’s first-quarter earnings due to a rosier fiscal 2024 outlook and time value. More concretely, while we believe that the firm’s planned investments (as laid out at investor day) should drive an inflection point in sales, higher planned capital spending and selling, general, and administrative expenses largely dilute those impacts—primarily as the firm strives to invest in supporting its capacity expansion. Incorporating the guidance, we now expect those accounts to comprise roughly 9% and 11% of sales in the longer term, respectively, up from the 5%-6% and 9% estimates we’ve previously contemplated. Still, shares continue to appear overvalued.

In our view, Lamb Weston’s blueprint remains effectively intact, with the firm prioritizing investments in capacity, geographic expansion, and product mix optimization. We believe Lamb Weston is set to capture higher volume prospects in emerging markets (boasting per capita consumption growth in the mid to high single digits annually) as it extends its geographic reach beyond its home turf, with its international arm expected to represent 34% of fiscal 2024 sales. Further, the firm’s focus on profitable coated fries and delivery of innovative products to non-traditional fry channels underpin our 4%-5% top-line growth longer term.

Regarding profitability, we maintain our high-teens operating margins by fiscal 2033 despite stepped-up operating costs. Beyond product mix optimization, we believe Lamb Weston can yield operational efficiencies through an upgraded fixed asset base and improved throughput while continuing to leverage its global scale and entrenched relationships with restaurateurs (sources that underpin our narrow-moat rating), with renewed contracts set to offer more flexible pricing arrangements.