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Insider Weekends: Inflation Takes a Bite Out of a Potato Company

  • October 17, 2021

One of the things I look forward to each week is the potential discovery of a new idea on account of insider buying. Every once in a while, especially during earnings related quiet periods, we encounter a week where the insider purchases are lackluster. This happens to be one of those weeks where the only company that appeared to be mildly interesting was an Idaho based potato products company. Food products companies for the most part sport low single digit margins and slow growth unless they are riding the wave of a new trend (fake meat or oat milk anyone?). Lamb Weston Holdings (LW) is no exception, delivering net income of just $30 million (a decline of 67% year-over-year) on sales of nearly $1 billion in its recently reported fiscal Q1 2022.

The company’s bottom line was hurt by high inflation in input costs, labor and transportation. The company expects this inflationary pressure to continue through the rest of fiscal 2022. So much for transitory inflation. If inflation had indeed been transitory as the Fed would have us believe, Social Security would not have approved a 5.9% increase to the cost of living adjustment (COLA) for 2022. This adjustment was just 1.3% for 2021.

The only reason the company was mildly interesting was because the insider buying shares was previously the CFO of McDonald’s (MCD) and retired as the Chief Administrative Officer of McDonald’s in 2016. Peter Bensen joined Lamb Weston’s Board of Directors in 2017 and this is the second time he has purchased shares of the company since he joined the board. His enthusiasm for the stock could be attributed to revenue growth at Lamb Weston during the last two quarters where revenue jumped double digits to around $1 billion. However that jump was compared to the prior year pandemic quarters when several restaurants were shut down. Revenue in the most recent quarters is at the same level as pre-pandemic quarters.

Someone who spent 20 years at McDonald’s probably knows something about a company that makes frozen french fries or maybe he sees the big drop in the company’s shares in recent weeks as a buying opportunity. Barring the pandemic related drop, the stock has not been this low since early 2018, which was incidentally the first time Mr. Bensen purchased shares on the open market. At a forward P/E of 34.43 and a forward EV/EBITDA of 16, the stock doesn’t strike me as particularly attractive. By some miracle, if high inflation indeed proves to be transitory, Lamb Weston could be worth revisiting in the future.

Welcome to edition 589 of Insider Weekends. Insider buying more than doubled last week with insiders purchasing $150.04 million of stock purchased compared to $65.59 million in the week prior. Selling on the other hand declined to $1.36 billion compared to $2.69 billion in the week prior.

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