This week we review earnings from Lamb-Weston Holdings (LW) and provide updates on others. Our podcast covers these topics and some thoughts on why waving off rising interest rates because they are “fully discounted” may not be a good idea.
Next week, we anticipate earnings from Wells Fargo (WFC) and BAM Reinsurance Partners (BAMR). The following week brings earnings from Holcim (HCMLY), Mattel (MAT) and Xerox (XRX), with the quarterly earnings deluge starting the following week when 12 companies report.
Earnings updates:
Lamb Weston Holdings (LW) – As the largest producer of frozen potato products (mainly French fries) in North America, Lamb-Weston’s revenues fell sharply when restaurants closed during the pandemic and continues to feel the effects from supply chain issues. We believe “Lamb” is a sturdy company, conservatively financed, with a strong market position among fast food restaurants (McDonald’s is a 10% customer, for example) and other food service venues. LW shares trade at an oversized discount to their underlying value.
Lamb reported respectable sales growth, yet earnings grew sharply as the company was able to implement sizeable price increases. Lamb has secured adequate raw potato supplies and is making progress with improving its manufacturing productivity initiatives. The company has a way to go before it is operating at its revenue growth and margin potential, but the earnings report was better than investors anticipated, and Lamb provided encouraging-enough guidance, so the shares rose 8% for the day.
In the quarter, revenues grew 7% from a year ago but fell about 2% below the consensus estimate. Adjusted earnings of $0.73/share rose 62% and were nearly 70% above the consensus estimate which called for essentially no earnings growth. Adjusted EBITDA of $220 million was 31% higher than a year ago and 32% above the consensus estimate.
Higher pricing and higher-value mix, particularly in the food service channel, added 12% to revenues. These offset much of the cost inflation from rising raw potato costs (up 20%), lower yield per potato, and production inefficiencies from labor and commodity shortages. The gross margin expanded to 23.1% from 22.0% a year ago. Overhead costs fell $9 million as lower routine and temporary costs more than offset higher technology spending.
Volumes fell 5%. Logistics difficulties weighed on international sales, Omicron concerns held back fast-food restaurant traffic, and Lamb’s inability to provide adequate volumes to grocery stores weighed on retail volumes. The company appears to have prioritized its fast-food and other restaurant customers, perhaps due to contractual obligations, over its grocery store customers. We find this an acceptable trade-off.
Lamb’s balance sheet remains solid, but free cash flow is weak as the company’s earnings are lower, it continues to build inventory and its capital spending remains elevated.
Over the next year, the pricing and yield of the upcoming potato crop will have a sizeable influence on Lamb’s profits. But management was optimistic that this crop will be close to normal following last season’s dismal crop. We anticipate a full recovery for the company. The incrementally improved guidance for fiscal 2022 and the company’s commitment that it will deliver on this guidance, as well as its stated confidence in returning to pre-pandemic gross margins, points in this direction, although the full recovery will take until likely early 2023.
Friday, April 8, 2022, Subscribers-Only Podcast:
Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.
Today’s podcast is about 10 minutes and covers:
- Earnings:
- Lamb Weston (LW) – “good enough” earnings lifts the shares
- Comments on other recommended companies:
- Conduent (CNDT) – to divest its Transportation segment, shares surge
- Newell Brands (NWL) – completes the sale of its home security business
- Molson Coors (TAP) – adds a board member
- Gannett (GCI) – adds a Neflix executive to its board
- Shell (SHEL) – large $5 billion write-off from Russia exit isn’t a problem
- Elsewhere in the market
- Some thoughts on why waving off rising interest rates because they are “fully discounted” may not be a good idea
- Final note:
- Turnaround by the Boston Celtics
Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.
| Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | 4/7/22 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 4.22 | 0.0% | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 12.14 | 0.0% | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 35.24 | 0.0% | Buy (44) |
| Small cap | ZimVie | ZIMV | Apr 2022 | 23.00 | 23.24 | 0.0% | Buy (32) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 22.06 | 0.0% | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 5.38 | 0.0% | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 33.12 | 0.0% | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 65.26 | 1.5% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 19.38 | 5.2% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 12.72 | 0.0% | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 10.81 | 4.4% | Buy (26) |
| Mid cap | Vistra Corporation | VST | Jun 2021 | 16.68 | 24.12 | 2.8% | Buy (25) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 36.20 | 3.1% | Buy (46) |
| Mid cap | Marathon Oil | MRO | Sep 2021 | 12.01 | 24.93 | 1.1% | Buy (30) |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 33.22 | 0.0% | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 42.39 | 1.9% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 18.86 | 5.0% | Buy (25) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 56.71 | 0.0% | Buy (93) |
| Mid cap | Polaris | PII | Feb 2022 | 105.78 | 103.61 | 0.0% | Buy (160) |
| Mid cap | Goodyear Tire & Rubber | GT | Mar 2022 | 16.01 | 12.72 | 0.0% | Buy (24.50) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 89.46 | 0.4% | Buy (160) |
| Large cap | Shell plc | SHEL | Jan 2015 | 69.95 | 55.42 | 3.5% | Buy (60) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.44 | 1.7% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 23.16 | 2.7% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 7.72 | 3.4% | Buy (24) |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 20.54 | 3.1% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 9.13 | 4.8% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 21.81 | 4.2% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 16.86 | 6.0% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 40.31 | 4.0% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 50.49 | 3.0% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 346.51 | 0.0% | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 47.74 | 1.7% | Buy (64) |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 47.76 | 0.0% | Buy (78) |
| Large cap | Altria Group | MO | Mar 2021 | 43.80 | 53.73 | 6.7% | Buy (66) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 26.55 | 0.0% | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 45.11 | 4.2% | Buy (70) |
Disclosure
: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.
Please feel free to share your ideas and suggestions for the podcast with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.Market cap is as-of the Initial Recommendation date. Current status indicates the rating and Price Target in ( ). Prices are closing prices as-of date indicated, except for those indicated by a "*", which are price as-of SELL recommendation date.