Lamb Weston And The French Fry Indicator
Lamb Weston (NYSE:LW) is among the very few consumer staples companies that have not had a fantastic post-COVID experience. The company, hampered by its exposure to restaurants and hospitality, saw its revenue drop sharply in the fiscal Q4 period of 2020 (calendar Q2) and the rebound has been less than stellar.
Now, more than a year into the crisis, the company is still struggling with COVID-related issues but there is a light at the end of the tunnel. With vaccine use spreading, the outdoor dining season upon us, and economic reopening underway management is expecting volumes to begin increasing and we think their forecasts are too cautious. Americans love to eat out and we've been shuttered away far too long. When we feel safe getting out to the local diner, the burger joint, the pub, the parks, and vacation spots the restaurants need to be ready for business.
Lamb Weston, Slow Business But Not Bad Business
Lamb Weston's business in the Q3 period is down on a YOY basis but not bad, at least not in terms of making profits, paying the bills, delivering dividends to shareholders, and buying back stock. The $895.8 million in revenue is basically flat on a sequential basis but down -4.4% from last year and nearly 1000 basis points better than expected. The decline is driven by a -6.6% reduction in volume that was partially offset by higher prices. Moving down the report, the company saw a noticeable reduction in margin due to COVID-related supply chain issues that shaved 41% off of the bottom line. On a GAAP basis the $0.45 in earnings missed by $0.08 while the adjusted $0.45 missed by $0.06.
Looking forward, the company is expecting the rebound to begin accelerating in the fiscal 4th quarter and return to pre-COVID levels by the end of the calendar year. The quarter-to-date results are promising and suggest this forecast is cautious. Volume in the U.S. is already running at 90% of pre-COVID levels with the EU and International markets trailing but expected to catch up soon.
"We remain optimistic that overall demand in the U.S. will steadily return to pre-pandemic levels around the end of calendar 2021, and that global category growth will resume at historical rates soon thereafter. Our recently-announced investments to construct a new manufacturing facility in China, as well as the expansion of our chopped and formed product capacity in the U.S., underscore our confidence in the long-term health of the global category, as well as our strategy to support the growth of our customers as they continue to expand across our key markets,"
Lamb Weston Gives Value To Shareholders
Business at Lamb Weston has been slow but not to the extent it has damaged the company's financial position. Even at the reduced rate earnings are more than enough to cover the 1.15% dividend yield with room to spare for things like buybacks. As of the Q3 report, the annualized payout is about 42% of earnings with ample free cash flow to sustain dividend increases this year without an uptick in business. The balance sheet metrics are a little off due to the reduced cash flow but still healthy if not rock-solid. Leverage is a little high at 7.5X earnings and coverage a little low at only 4.5X debt obligation but that is mitigated by the outlook. With revenue, earnings, and profitability on track for improvement this quarter and next fiscal year both leverage and coverage are already improving.
The Technical Outlook: Lamb Weston Falls But This Is One Hot Potato
Shares of Lamb Weston are down about 2.0% in early action following the FQ3 release but support is already evident. Buying support is showing up at the previous resistance level of $79 and is likely to be strong. The indicators are consistent with support at this level and more, stochastic is showing a clear buy signal and MACD is about to confirm it. If price action is able to move higher from here we see momentum building to drive the stock up to retest the recent highs. Once we get some positive news out of the restaurant industry we expect this stock will quickly recover the pre-COVID high of $95 and then move higher again.
