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Turnaround Letter
Out-of-Favor Stocks with Real Value

April 9, 2021

Today’s note includes earnings updates and the podcast.


Today’s note includes earnings updates and the podcast.

Lamb Weston (LW) reported earnings this past week. Next week, Wells Fargo (WFC) reports on Wednesday, and the following week has Baker Hughes (BKR), Credit Suisse (CS), Mattel (MAT) and Biogen (BIIB) reporting earnings.

There were no ratings or price target changes this past week.

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 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 the market will more fully recognize the company’s value.

Lamb reported fiscal third-quarter revenues of $896 million, down only 4% from a year ago and about 10% higher than consensus estimates. Adjusted earnings per share fell 42%, to $0.45, which was 12% below estimates. Adjusted EBITDA of $167 million was 27% weaker than a year ago and 5% below estimates.

From a revenue perspective, Lamb has mostly recovered from the pandemic. In the U.S., restaurant traffic was about 85-90% of year-ago levels, although demand from lodging, schools, sports and other non-commercial customers remains at about 50% of year-ago levels. Grocery demand continues to be strong at 115-125% of year-ago levels. Demand outside of the U.S. is slower due to the extended lockdowns. Better pricing is helping offset some of the weaker volumes.

The company estimates that volumes will fully recover by the end of calendar 2021.

Where the company is still struggling is in its manufacturing and distribution costs. Due to Covid illnesses, absenteeism and safety protocols, production lines were intermittently shutdown, resulting in inefficient stop/starts as well as continued pay for workers despite less work hours (fully paying workers in these situations makes a lot of sense in our view despite the short-term costs). Also, previously-deferred maintenance projects were re-started, adding to costs and disruptions. Downstream warehousing and transportation costs were higher as well due to the manufacturing disruptions. We estimate these costs totaled at least $45 million in the quarter.

Once the facilities are running at full efficiency, Lamb’s cost structure should be lower than pre-pandemic levels, although this won’t happen for six to 12 months.

Lamb’s balance sheet remains sturdy and improved from a year ago (the pandemic was just starting to hit by month-end March 2020). Capital spending is ramping up for construction of a $250 million new production facility in China to meet the strong demand there. As investors, we are perhaps a tad wary of investing in China, but it would seem that French fries are unlikely to be affected by the rising tensions.

The company looks poised to produce revenues of 10% or more above pre-pandemic levels, but with slightly lower margins. Overall, we see the upside as somewhat limited but with a relatively high probability of reaching our 85 price target, so we are retaining our Buy rating for now.

Ratings Changes
No changes this week.

Thursday, April 9, 2021 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.

Today’s podcast is about 15 minutes and covers:

  • Brief updates on:
    • General Motors (GM) – chip shortage worsens, but 1Q earnings could still be strong as vehicle volumes and prices are robust.
    • Royal Dutch Shell (RDS/B) – brief update on 1Q.
    • Wells Fargo (WFC) – no damage from Archegos, but why are they even in this business?
    • Credit Suisse (CS) – Archegos loss is $4.7 billion. What future will they choose?
    • Signet Jewelers (SIG) – small acquisition of Rocksbox is worthwhile experiment.
    • Toshiba (TOSYY) – company is now effectively in play.

  • Elsewhere in the Market:
    • Value-momentum reflexivity.
    • Our sell discipline.
    • A quote from Warren Buffett that is timely here.

  • Final note:
    • Timely investment advice from Paris Hilton.

Please feel free to share your ideas and suggestions for the podcast with an email to either me at or to our friendly customer support team at 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.