I’m pleased to bring you your weekly subscriber-exclusive update and podcast.
Earnings reports by Cabot Turnaround Letter recommended companies:
Lamb-Weston (LW) – As the largest producer of frozen potato products (mainly French fries) in North America, Lamb-Weston’s revenues fell sharply when fast-food and other restaurants closed during the pandemic. 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 remain undervalued. Once the sales-reducing effects of the pandemic are in the past, we believe LW shares will more fully recognize the company’s value.
In its first fiscal quarter, Lamb reported that revenues fell 12% from a year ago, while income from operations of $136 million fell 20%. Adjusted EBITDA of $202 million fell 13% and per share earnings of $0.62 fell 23%.
Revenues were in-line with consensus estimates while Adjusted EBITDA was 41% higher than estimates. Per share earnings were about twice the estimate. So, compared to estimates, Lamb reported a good quarter. LW shares have risen about 10-12% in the past week partly due to the strong report and the balance likely to anticipation of good earnings.
Perhaps more revealing of Lamb’s progress with adjusting to the pandemic, we looked at sequential quarterly changes (from the Mar-June period). Here, revenues increased about 3% but Adjusted EBITDA increased by 160%. Lamb clearly is operating much more efficiently on only small revenue gains.
The company said that demand continues to increase. Overall, North American shipments are back to about 90% of prior year levels, with quick-service restaurants and retail channels boosting demand. Revenues from lodging, health care and schools remain about 50% weaker than a year ago. Going into the winter months, they anticipate a slowing in full-service restaurants as outdoor dining will slow down. The potato crop appears normal, and pricing remains stable although some markets are seeing modest pricing pressure which may be relieved as volumes increase. Lamb is also seeing some pressure as lower-priced private label volumes weigh on overall pricing.
Lamb produced a healthy $251 million in operating cash flow compared to $239 million a year ago, boosted by about $50 million in cash released from working capital. The company repaid much of its earlier borrowing as conditions have stabilized. Debt net of cash is now lower than a year ago. New credit agreements and new notes provide considerable liquidity with extended maturities provide more financial flexibility.
Revenues in the next few quarters should show more stabilization and we anticipate a return to revenue growth in the spring. Free cash flow may lag as working capital is rebuilt and as capital spending increases to more normal levels. Overall, Lamb is on the road to recovery. The shares remain BUY-rated and have about 18% upside to our 85 price target.
Friday, October 9, 2020 Subscriber-Exclusive Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.
Today’s podcast is about 8 minutes and covers brief updates on:
o Wells Fargo (WFC) reports next week
o Lamb-Weston (LW) – first quarter earnings
o GameStop (GME) – new strategic alliance with Microsoft lifted the shares 44% yesterday
o General Electric (GE) – CEO Culp shuffles his management team, the company received a Wells Notice and a Goldman Sachs upgrade to Buy
o Jeld-Wen (JELD) – now trading above our price target so we are reviewing this rating
o Barrick Gold (GOLD) – CEO Mark Bristow is making good progress with getting the company’s operations under control, and Barrick may be raising its dividend
o Molson Coors (TAP) – we highlight how this stock is deeply undervalued despite its relatively stable fundamentals and is a good candidate to buy on its weakness.
To listen to the podcast click here
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.