Lamb Weston Upsizes its Share Repurchase to $500 Million – Buyback Wednesdays

Lamb Weston (LW) is a successful spinoff story. Since its spun out of Conagra Brands (CAG) in November 2016, the potato products company has outperformed the S&P 500 by more than 88%! The company’s President and CEO, Tom Werner is a superstar. Mr. Werner had served at Conagra for 17 years. He was instrumental in the Lamb Weston spin-off, established an executive leadership team and built all of the capabilities for a standalone organization.

Under his leadership, Lamb Weston has grown its global manufacturing footprint through organic expansions and strategic acquisitions, despite the pandemic and a bad potato crop in 2022. The company consistently beats estimates and often increases its forecasts.

Lamb Weston Holdings, Inc. (LW): $86.88

Market Cap: $12.27B

EV: $15.58B

Key Insights

• Lamb Weston is one of the largest producers and processors of frozen potato products.
• The company has leading market positions, including #1 in North America and #2 globally in the frozen potato category.
• The company plans to distribute cash to shareholders with a target dividend payout ratio of 25% to 35% of net income and share repurchases under its newly expanded authorization.
• It reported impressive Q1 FY2024 financial performance, with revenues beating estimates by $51.57 million and rising 47.95% year over year, including $375 million of incremental sales attributable to acquisitions.
• Strong pricing across various channels offers a positive outlook for the company, even amid declining organic volume. The company continually increases its sales and earnings forecasts.
• Shifting to high-margin businesses will help improve the company’s long-term margins.

CEO Tom Werner spoke about the shift and commented,

“We should see our year-over-year volume trends improve as the year progresses as we begin to lap and backfill exited volumes with higher-margin business. Overall, we feel good about the health of the category, our first quarter financial results, and our operating momentum, and have raised our sales and earning targets for the year.”

Headquartered in Eagle, Idaho, Lamb Weston has grown to be one of the world’s largest frozen potato companies and is a leader in frozen food distribution. Lamb Weston has 27 factories globally and its products can be found in more than 100 countries around the world.

The company’s stock price at $86.88 hovers close to its 52-week low. This could be due to the decline in volumes highlighted by management.

“In addition, we expect our capacity to produce coated fries, specialty cuts and chopped and formed varieties, such as puffs and hash browns will remain constrained until our new production facilities in China and Idaho become available late in fiscal 2024.”

On October 11, 2023, Lamb Weston’s Board of Directors increased the company’s share repurchase authorization to $500 million, including approximately $124 million of remaining unused capacity under the Board’s previous repurchase authorization. This represents around 2.8% of its market cap at announcement. 

Frozen Potato Market Trend

Quick Service Restaurants (QSRs) primarily favor items like frozen French fries, hash browns, and formed or filled/topped potato products due to their time-saving attributes. Frozen potatoes necessitate minimal preparation and are user-friendly, enabling QSRs to deliver prompt service, a core advantage of these establishments when serving their customers. The substantial growth of the frozen potato market is largely attributed to the rapid proliferation of fast-food eateries and Quick Service Restaurants.

Global Demand vs. Supply

The global frozen potato segment remains robust, with a consistent equilibrium between overall demand and supply. This balance in global supply and demand is anticipated to endure even in the long run providing for stable input costs for Lamb Weston.

Source: Lamb Weston (Investor Presentation)

Valuation

Lamb Weston is valued at a discount when compared to the sector median with a forward P/E of 15.84 and a forward EV/EBITDA of 9.61. Its P/E is only half its 5-year average. The low valuation could have triggered the management to expand its share repurchase program. Even as we were writing this article, an insider purchase by a long-serving director slid in.

Share Repurchase

Lamb Weston has returned more than $1.2 billion to shareholders in the form of share repurchases and dividends to shareholders since becoming an independent public company in 2016. In the first quarter of fiscal 2024 (fiscal year ends in May 2024), the company returned over $140 million of cash to its shareholders, of which $41 million was distributed as dividends. The majority of the cash return was achieved by repurchasing $100 million worth of shares, which is more than double the amount of shares the company bought back in all of fiscal 2023. This decision was made opportunistically and was influenced by the company’s stock price performance during the open trading window in August.

Source: InsideArbitrage

However, the share repurchases do not appear to have a significant impact on the number of the company’s shares outstanding. Over the past three years, the reduction has been minimal, with only 0.34% of shares retired. This suggests that the company’s primary purpose for initiating share repurchases is to counterbalance the dilution resulting from stock-based compensations granted to its employees.

The following statement by management confirms this,

“While our share buyback program is targeted to offset annual equity compensation dilution, we will continue to be opportunistic based on other capital allocation needs and the potential for generated solid returns based on our stock’s trading value.”

Dividends

Since 2017, the company has been consistently increasing its dividends with a growth rate of 7.34%. Currently, the forward dividend yield is 1.35% with a payout ratio of 19.51%, which is relatively low. However, the future projections of payout expansion to 25% – 35% suggest that the dividends are likely to increase in the near future.

Balance Sheet and Cash Flow

Lamb Weston has $163.3 million of cash and cash equivalents. While the current liabilities are taken care of by the current assets, the company has net debt of $3.28 billion. Approximately 85% of its debt matures after 2026 with the vast majority maturing after 2030.

Source: Lamb Weston (Investor Presentation)

The company generated about $335 million of cash from operations fiscal Q1 2024, which is about $143 million more than the prior-year quarter. Capital expenditures were about $267.3 million, which is up about $166 million from the prior-year quarter, primarily due to construction costs as the company continues to expand processing capacity in China, Idaho, Argentina, and the Netherlands.

Acquisitions

Lamb Weston has been growing by expanding its geographical footprint globally through acquisitions. Recently, the US potato giant expanded its presence in Australia’s food service market with the acquisition of Crackerjack Foods. Victoria-based Crackerjack Foods supplies frozen potato cakes, battered sausage and crab sticks to the out-of-home channel, including restaurants and fish and chip shops. It has annual revenues of around $20 million which will be absorbed by Lamb Weston as part of the deal.

The Crackerjack acquisition marks its third in Australia in five years. Lamb Weston acquired Marvel Packers in 2018 and Ready Meals in 2019, with both of those businesses coming with processing facilities in the Melbourne suburb of Hallam. Ready Meals operates the Harvest Choice brand of frozen potato products. Crackerjack Foods’ CEO Fotiadis will stay with the company for a six-to-12-month transition period.

Growth

Lamb Weston has grown revenue at a CAGR of 17.03% over the last three years, partly owing to its acquisitions. This is much higher compared to its old parent, Conagra Brands, which has compounded revenues at 2.67% over a three-year period. Forward revenue growth of over 20% and EPS growth of around 45% look promising.

Profitability

The company’s gross margin of 28.61% is not very impressive but the fact that the company is able to pull off a high net income margin of 17.18% is commendable.

Q1 FY2024 Results

The company started fiscal 2024 with a strong first quarter. Given the company’s acquisitions and in an effort to align with Lamb Weston’s expanded global footprint, management, has reorganized operations as two business segments versus the prior four reportable segments. Now segments are simply “North America” and “International”.

• Excluding the incremental sales from acquisitions, net sales grew 15%; price-mix was up 23% as the company benefited from the pricing actions taken in fiscal 2023 in both its North America and International segments to counter input and manufacturing cost inflation.
• Net sales for the “North America” segment which includes U.S., Canada, and Mexico, increased $179.8 million to $1.14 billion, up 19% versus the prior year quarter. Price/mix increased 24%, while volume declined 5%. Adjusted EBITDA increased $147.6 million to $379.4 million.
• Net sales for the “International” segment which includes all sales outside of North America, increased $359.9 million to $529.9 million, but that did include $374.9 million of incremental sales attributable to its acquisition. Adjusted EBITDA increased $56.5 million to $89.6 million, up 171%.
• Organically, volumes slipped 8% from the prior year. This was because of continued inventory destocking by certain customers in international markets and in select U.S. retail channels.
• Gross profit increased $226.2 million versus the prior year quarter to $499.5 million. This was again a result of strong benefits from pricing actions, which more than offset higher costs on a per-pound basis of shipments.
• Income from operations increased 106% from the prior-year quarter to $323 million.
• Net income increased to $235 million from $232 million in Q1 FY2023.
• Earnings per share was $1.63 which surpassed consensus by $0.55.

Fiscal 2024 Outlook

Based on strong first-quarter performance, the company raised its financial targets for the year.

Source: Lamb Weston (Investor Presentation)

The company expects year-over-year volume trends will continue to improve as the year progresses, as it laps some of the significant low-margin profit volume that the company chose to exit in the second half of last year.

Risks

The packaged food industry is highly competitive. Companies must continually innovate to meet evolving consumer needs, including demand for healthier and sustainable options. Efficient supply chain operations, from sourcing ingredients to distribution, are essential. Maintaining a reliable and cost-effective supply chain is a competitive advantage. Poor potato crops and quality can have an impact on both Lamb Weston’s sales and margins.

Bottom Line

Lamb Weston has been innovative since its spinoff from Conagra. It is also expanding its global presence through acquisitions. Management’s strategic shift away from lower-margin businesses should enhance long-term margin structure. The increasing demand for the frozen potato market and the expansion of fast-food restaurants and QSRs are more likely to drive the company’s growth. The company has followed disciplined and balanced capital allocation priorities, including reinvesting in the business and returning cash to shareholders.

With a low valuation, a dip in its stock price and debt maturities after 2026, the company presents an attractive investment opportunity.

The company has managed to beat earnings estimates in all last eight quarters and revenue estimates in six out of the last eight quarters. Four analysts have revised their earnings upwards for the company over the last 90 days.

Welcome to edition 81 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

The level of buyback announcement activity was muted last week, with just three companies announcing buybacks, compared to six companies in the prior week.

Top 3 Stock Buyback Announcements 

1. Lamb Weston Holdings, Inc. (LW): $86.88

On October 11, 2023, the Board of Directors of this frozen potato company announced that it has increased the company’s share repurchase authorization to an aggregate amount of $500 million, including approximately $124 million of remaining unused capacity under the Board’s previous repurchase authorization. This is equal to around 2.8% of its market cap at announcement.

2. Mondee Holdings, Inc. (MOND): $5.2

 On October 17, 2023, the Board of Directors of this travel technology company authorised an additional $10 million expansion to its share repurchase program, equal to around 2.25% of its market cap at announcement.

3. GreenTree Hospitality Group Ltd. (GHG): $4.4

On October 13, 2023, the Board of Directors of this hotel manager approved a new $10 million share repurchase program, equal to around 2.21% of its market cap at announcement.

If you are reading this article and have not signed up to receive such articles by email, please sign up for our free, IA Plus or IA Premium service here. If you are an existing subscriber, you can login to the InsideArbitrage.com website to adjust the kinds of articles you receive by email by turning on or turning off specific categories of articles.