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Turnaround Letter
Out-of-Favor Stocks with Real Value

October 8, 2021

This week’s update includes our comments on LambWeston’s (LW) earnings as well as commentary on several stocks. We had no ratings changes this week.


This week’s update includes our comments on LambWeston’s (LW) earnings as well as commentary on several stocks. We had no ratings changes this week.

Next week, Wells Fargo & Company (WFC) and Walgreens Boots Alliance (WBA) report earnings, on Thursday.

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. 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.

Back to square one (or below): On disappointing earnings and a weaker near-term outlook, LW shares have round-tripped to slip below the $61 price when we made our initial recommendation. This is a frustrating situation, especially since the shares ticked around our $85 price target earlier this year. We had been optimistic that more post-pandemic profits would continue to lift the shares.

Fundamentally, this quarter’s weak results push out Lamb’s post-recovery value. But, it doesn’t necessarily diminish that value. Over time, the company should be able to recover its higher costs, and also reap higher profits from its large capital spending projects. However, there is no guarantee that these projects will be as successful as hoped for, and the elevated costs may slightly permanently crimp Lamb’s margins.

For now, we are keeping our price target at 85, recognizing the changing dynamics, and reiterate our Buy at today’s discounted share price.

In the quarter, revenues were encouraging, up 13% from a year ago, as the recovery continued across its fast-food chains, independent restaurants and food service segments. Sales in the retail segment fell 14% as the company lost an account, and as customers slowed their purchases now that the pandemic is fading. Sales were essentially in line with consensus estimates.

The major problem was costs. While sales rose by $112 million, cost of sales including advertising rose by $175 million, or nearly 27%. The weak potato crop boosted commodity potato prices, while higher costs for edible oils, trucking and ocean freight as well as labor pressured profits. Difficulties finding and scheduling workers added to costly production disruptions. Lamb said that these pressures will remain a problem for the next three quarters. Net income of $0.20/share fell 67% from a year ago and was 47% below the consensus estimate. Adjusted EBITDA of $123 million fell 39% from a year ago and missed the consensus estimate by 22%.

Due to the weaker outlook, the company reduced its fiscal 2022 capital spending by $200 million, to $450 million.

Lamb remains financially solid, with $790 million in cash and $2.7 billion in debt, is producing decent free cash flow and continues to hold a strong frozen potato franchise. We are staying with the Lamb Weston turnaround, particularly with the discounted share price.

Ratings changes:

Friday, October 8, 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 13½ minutes and covers:

  • Brief updates on:
    • Dril-Quip (DRQ) – CFO departs for Kirby Corp. Was he bored?
    • Meredith Corp (MDP) – deal finally announced, we’re not pleased with the price.
    • General Motors (GM) – impressive future plans but a lot can go wrong.
    • Macy’s (M) – an activist investor says they should spin out their e-commerce business. We’re skeptical.
    • Walgreens Boots Alliance (WBA) – opioid trial in Ohio creates some risk.
    • Mattel (MAT) and Newell (NWL) – could see holiday disruptions and higher costs.
    • Royal Dutch Shell (RDS/B) – benefitting from higher natural gas prices. Our take on turnaround commodity stocks, including Marathon Oil (MRO).

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.

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.