Lamb Weston (NYSE:LW) is a consumer staples company and one that has not been doing all that well. While peers in the group are seeing accelerated growth, increasing profits, and higher share prices Lamb Weston is not and there is one simple reason. The bulk of its products (potatoes) are used by the restaurant industry and the restaurant industry is one of the hardest hit by the pandemic.
The good news is the company has been able to shift production to meet increased consumer demand and the rebound in restaurants is underway. It will be years before it is fully recovered but those restaurants who are able to operate are seeing solid demand. People like their french fries, steak fries, waffle fries, mashed potatoes, baked potatoes, and hash browns. The question is, is it enough to bring this company back to growth?
A Mixed Report Lifts Lamb Weston
The top-line revenue came in at $871.5 million or down -11.9% from last year. This is slightly below forecasts but only by $2.1 million which I think a slim margin. Only 0.2%. The negative in the number is that it doesn’t show the momentum or strength I’ve seen in other staples companies but that may change in the coming quarter. Others in the group are at least beating the consensus estimates if not by a wide margin and it’s not like the company has seen any recent upgrades.
On a segment basis, the Global and Foodservice segments both saw net declines while Retail increased. Global is the company’s largest segment, it shrank 15% YOY, Foodservice is 2nd largest and it declined by 22%. Retail, the smallest segment, grew nearly 20% but not enough to offset weakness in other areas.
The good news is on the bottom line and in the guidance. The GAAP EPS came in at $0.61 which is more than a quarter above the consensus estimate. The figure is down on a YOY basis but effective cost-controls helped mitigate the decline. Much of the decline in income, about 58%, is attributable to one-time charges directly related to the virus such as shut-downs, lost crops, mitigation efforts, and employee retention.
As for guidance, management says that International Trends are approaching last year’s levels while U.S. demand is lagging. This may not seem like great news but it means positive cash flow, a healthy balance sheet, and sustained dividends. In the U.S., orders from large chain operators ran at 95% in the first four weeks of the calendar 4th quarter with weaker demand from small and medium-sized restaurants. The retail sector is expected to hold steady from last year’s levels.
The Dividend Is Safer Than It looks
Lamb Weston pays about 1.3% with shares at $73.00. This is not the highest in the consumer staples sector, far from it, but there is an expectation of growth. The company has increased for the last three years and there is room on the balance sheet for another. The payout ratio is running in the low 30% range relative to quarterly earnings.
At first glance, the company’s debt seems a bit high but there are some mitigating factors. The two primary factors are that 1) the debt was used to raise cash in case of need during the crisis and 2) the company is still sitting on all that cash. Over the past quarter, management paid off a fully-drawn revolving credit facility and extended the maturity on other debt while maintaining a large cash balance which puts them in an even better position. In addition, cash from operations is more than enough to cover dividends and obligations, and it’s up 12% from last year.
The Technical Outlook: Lamb Weston Might Break Out
Shares of Lamb Weston are up following the earnings release but not enough to break out of their range. The indicators and price action are bullish so we may see such a breakout but I am not holding my breath. The winter is fast approaching and that means restaurants utilizing outdoor seating are going to shut it down. This doesn’t mean an end to Lamb Weston’s recovery but it will dampen results going forward. With that in mind, I see this stock falling back from resistance at the $75 level and remaining within its range for the near to mid-term at least (or until restaurants can open fully). 
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