On Friday, Goldman Sachs adjusted its outlook on Lamb Weston Holdings Inc . (NYSE: NYSE:LW) stock, reducing the price target from $132 to $139 while maintaining a Buy rating. The revision followed a significant underperformance of Lamb Weston shares on Thursday, which saw a drop of 19.4% compared to the S&P 500's decline of 1.2%.
The decrease came after the company's third-quarter fiscal year 2024 results, reported in February, failed to meet analyst and consensus estimates. The company also revised its forward volume expectations downward, amplifying concerns over potential risks to pricing and margins in fiscal years 2025 and 2026.
The quarterly weakness was particularly pronounced in North America, where volume declines and price/mix increases fell short of expectations. Volume decreased by 17%, a steeper drop than Goldman Sachs' estimate of 4%, and price/mix was up by 5%, below the 8% Goldman Sachs had anticipated.
Lamb Weston attributed about half of the volume shortfall to supply disruptions stemming from the enterprise resource planning (ERP) transition affecting the company's distribution and order fulfillment systems.
The management of Lamb Weston cited several factors contributing to the volume decline, including reduced general restaurant traffic, especially in quick-service restaurants (QSRs), and the ongoing impact of the company's decision to exit certain lower-margin businesses. The transition to the new ERP system also had an adverse effect on the mix of higher-value products, with additional costs incurred to minimize shipment disruptions.
In terms of financial impact, the ERP-related issues led to an estimated loss of approximately $135 million in sales and a $95 million hit to EBITDA. Furthermore, Lamb Weston took an inventory charge of $25 million due to the write-off of excess potato inventories. Despite these setbacks, the company's international performance exceeded Goldman Sachs' projections, with higher segment EBITDA margins partially compensating for the revenue shortfall caused by the price/mix discrepancy.
InvestingPro Insights
In light of the recent performance of Lamb Weston Holdings Inc. (NYSE: LW), real-time data and insights from InvestingPro offer a more comprehensive understanding of the company's financial health and market position. Lamb Weston's market capitalization stands at $11.77 billion, and it is currently trading at a P/E ratio of 13.49, which is relatively low considering the company's last twelve months' earnings growth. This could indicate that the stock is undervalued, especially when factoring in the PEG ratio of 0.11 from the last twelve months as of Q3 2024, suggesting potential for future earnings growth.
Despite the recent challenges, Lamb Weston has demonstrated resilience with a strong revenue growth of 36.22% over the last twelve months as of Q3 2024. Moreover, two InvestingPro Tips highlight significant aspects for potential investors: Lamb Weston has a track record of raising its dividend for 7 consecutive years, and analysts anticipate sales growth in the current year. This information may reassure investors of the company's commitment to returning value and its prospects for recovery.
For those seeking a more in-depth analysis, there are additional InvestingPro Tips available that could further inform investment decisions. With the use of coupon code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to valuable market insights and data. Lamb Weston's next earnings date is set for April 4, 2024, which will be a pivotal moment for the company to address its recent challenges and outline future strategies.
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