2023-03-31 07:30:00 ET
Summary
- The management team at Lamb Weston Holdings is due to report financial results covering the third quarter of the company's 2023 fiscal year in a few days.
- Analysts have high expectations, but these might not be unrealistic given current market conditions and how the company has fared as of late.
- In all, the company still seems to offer a decent upside for investors moving forward.
On April 6th, before the market opens, the management team at Lamb Weston Holdings ( LW ) is expected to announce financial results covering the third quarter of the company's 2023 fiscal year. Driven by strong demand and higher pricing, as well as more robust margins that come with these things, the company has already done quite well for the quarters of the 2023 fiscal year that have been reported. Analysts currently have high expectations regarding the third quarter as well. Based on what data is available on the market today, and assuming that analysts turn out to be accurate in their assessment, I do believe that the firm has some attractive upside from here. This is even after taking into consideration some nice upside that shares have experienced in recent months.
A look at expectations
In early January of this year, I wrote an article detailing the financial performance for the second quarter of the 2023 fiscal year for Lamb Weston. The company, which focuses on the production, distribution, and marketing, for frozen potato products, had done quite well leading up to that point. Sales, profits, and cash flows were all on the rise thanks to favorable market conditions and the company's ability to pass on more than its inflationary pressures onto its customers. At the time that I wrote the article, I acknowledged that the stock was a bit lofty. But given all that was going on in the space, I felt as though this elevator price was worth it. And that led me to rate the business a 'buy'. Since then, the company has performed well, but not as well as I would have hoped. While the S&P 500 is up 5.8%, shares of our prospect have seen upside of 5.4%.
To be clear, the purpose of this article is not to rehash the specifics of the second quarter. And because not much has changed, certainly nothing from a fundamental perspective and only marginally from a price perspective, I would not be repeating my valuation assessment of the company here. Instead, I advise you to look at the aforementioned article that I linked above. Rather, my intention is to focus on what the picture might look like when the company reports financial results in the coming days.
To start with, we should touch on revenue expectations. At present, analysts think that sales will come in at around $1.16 billion. If this comes to fruition, it would translate to a 21.5% increase over the $955 million in sales generated the same time one year earlier. If this sales increase sounds absurd, keep in mind that revenue growth in the first half of the 2023 fiscal year was 20.6% relative to the same time one year earlier. The greatest growth for the company during this time came from its Retail operations, with sales spiking 31% thanks to a price and product mix that added 38% to the segment's top line. Volume, meanwhile, negatively impacted results to the tune of 7%. This was followed up by a 23% increase in sales associated with the large Global segment, an increase that was driven by a 23% rise associated with pricing and product mix at a time when volumes were essentially flat year over year.
On the bottom line, analysts expect earnings per share of $0.99. This would represent a sizable improvement over the $0.73 per share the company generated in the third quarter of its 2022 fiscal year. Given the company's current share count, matching the expectations set by analysts would translate to net income of $143.2 million. That would be 34.3% above the $106.6 million generated only one year earlier. In addition to benefiting from a rise in revenue, the company has also seen a tremendous improvement in its cost structure. As you can see in the chart below, the gross profit margin for the company has been particularly robust in recent quarters, while selling, general, and administrative costs have declined on a percentage of revenue basis. The gross profit improvement came about even as the company dealt with higher costs and it was attributable to pricing actions that more than offset these cost increases on both the manufacturing and distribution side. Analysts have not provided guidance when it comes to other profitability metrics. But investors would be wise to keep an eye out on a couple of them. For context, operating cash flow in the third quarter last year was negative $33.5 million. But if we adjust for changes in working capital, it would have been $142.5 million. Meanwhile, EBITDA came out to $180.4 million.
Market conditions remain promising
Although the state of the economy remains questionable, the current expectation by leading authorities is that the picture for companies like Lamb Weston will remain favorable throughout at least this year. In its Food Price Outlook for 2023, the USDA stated that while food price inflation will slow relative to what it was in 2022, it will still be above historical averages. In 2022, food prices rose by 9.9%. Food at home costs jumped an astounding 11.4%, while food away from home prices grew a more modest but still extreme 7.7%. Of all the major food categories, those that saw the smallest increase were beef and veal, with prices still climbing a rather lofty 5.3%. To put this in perspective, total price inflation in 2022 was a much more tepid 3.5% for food at home, and 3.4% for food away from home.
When it comes to the 2023 calendar year, the expectation is for prices to increase by 7.5%, with food at home prices climbing 7.8% while food away from home prices growing 8.3%. Although supply chain issues have definitely eased, a number of factors such as climate change, continued conflict in Ukraine, issues like a nasty strain of the avian flu, and high oil prices, have all played a role in complicating the picture. When it comes to potatoes specifically, it is possible that some of the strong margins that Lamb Weston has benefited from might ease up to some degree as the year goes on. As I mentioned already, shipment volumes for the company have declined year over year. But total potato shipments and imports , combined, in the US for the current season ending late March of this year is about 0.8% higher than what we're seeing the same time one year earlier. Even with this potentially impacting the picture to some degree, it's worth noting that the Federal Reserve calculated that average potato prices per pound in the West census region of the country came in about 33.4% higher in February of this year than in February of 2022. And in January, they were up about 29.9% year over year.
Another sign that the picture of the company is likely positive is that, very recently, the firm announced a distribution per share of $0.28 for the latest quarter. That matched the $0.28 per share that was announced in December last year which, itself, was 14% higher on an annual basis than the prior distribution. Of course, investors should keep a close eye on guidance when management does report, since a change in the picture there could impact not only the distribution, but also the company as a whole. Considering that the company was previously forecasting net income of between $580 million and $620 million compared to the $200.9 million reported for 2022, and is forecasting EBITDA of between $1.05 billion and $1.10 billion compared to the $725.7 million reported for 2022, it's highly probable that even a downward revision in expectations would still leave the company far better off than it was last year.
Takeaway
Leading up to the earnings release, I believe that investors should be rather optimistic. As I said in my prior article on the firm, shares are not exactly cheap. This is even more accurate when you consider that the stock has risen some over the past few months. But on the whole, it does look as though the fundamental picture for the firm will continue to improve during this time and that shareholders will benefit as a result. So unless something major comes out of the woodwork, I would make the case that the company is still a 'buy' candidate leading up to the earnings release.
For further details see:
Lamb Weston Q3 2023 Earnings Preview: A Tasty Prospect On Rising Sales And Profits