Lamb Weston (LW)

Potato products company Lamb Weston (NYSE:LW) reported Q3 CY2025 results exceeding the market’s revenue expectations, but sales were flat year on year at $1.66 billion. On the other hand, the company’s full-year revenue guidance of $6.45 billion at the midpoint came in 0.5% below analysts’ estimates. Its non-GAAP profit of $0.74 per share was 38.7% above analysts’ consensus estimates.

Company Overview

Best known for its Grown in Idaho brand, Lamb Weston (NYSE:LW) produces and distributes potato products such as frozen french fries and mashed potatoes.

As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences. The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.

Competitors offering frozen or potato-based packaged foods include Hormel Foods (NYSE:HRL), Conagra Brands (NYSE:CAG), Kraft Heinz (NASDAQ:KHC), and private company McCain Foods.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $6.46 billion in revenue over the past 12 months, Lamb Weston is one of the larger consumer staples companies and benefits from a well-known brand that influences purchasing decisions.

As you can see below, Lamb Weston grew its sales at a solid 15% compounded annual growth rate over the last three years as consumers bought more of its products.

This quarter, Lamb Weston’s $1.66 billion of revenue was flat year on year but beat Wall Street’s estimates by 2.6%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products will face some demand challenges.

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

To analyze whether Lamb Weston generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.

Over the last two years, Lamb Weston’s average quarterly volume growth was a robust 5.3%. In the context of its 5.6% average organic revenue growth, we can see that most of the company’s gains have come from more customers purchasing its products.

In Lamb Weston’s Q3 2026, sales volumes jumped 6% year on year. This result was an acceleration from its historical levels, certainly a positive signal.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Lamb Weston has bad unit economics for a consumer staples company, giving it less room to reinvest and develop new products. As you can see below, it averaged a 23.9% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $76.13 went towards paying for raw materials, production of goods, transportation, and distribution.

This quarter, Lamb Weston’s gross profit margin was 20.6%, in line with the same quarter last year and exceeding analysts’ estimates by 9.9%. On a wider time horizon, Lamb Weston’s full-year margin has been trending down over the past 12 months, decreasing by 2.5 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Lamb Weston has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer staples business, producing an average operating margin of 12.1%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Lamb Weston’s operating margin decreased by 5.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Lamb Weston generated an operating margin profit margin of 9.4%, down 3.4 percentage points year on year. Since Lamb Weston’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

In Q3, Lamb Weston reported adjusted EPS of $0.74, up from $0.73 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Lamb Weston’s full-year EPS of $3.37 to shrink by 9.7%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Lamb Weston has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.4%, subpar for a consumer staples business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Lamb Weston to make large cash investments in working capital and capital expenditures.

Taking a step back, an encouraging sign is that Lamb Weston’s margin expanded by 10.8 percentage points over the last year. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Lamb Weston’s free cash flow clocked in at $274.4 million in Q3, equivalent to a 16.5% margin. This result was good as its margin was 16.3 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Lamb Weston’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 13.8%, slightly better than typical consumer staples business.

Lamb Weston reported $98.6 million of cash and $3.97 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.26 billion of EBITDA over the last 12 months, we view Lamb Weston’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $91.1 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Lamb Weston blew past analysts’ EBITDA expectations this quarter. We were also glad its gross margin outperformed Wall Street’s estimates. On the other hand, its full-year EBITDA guidance fell slightly short of Wall Street’s estimates. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 8.3% to $60.32 immediately after reporting.

Updated: December 4, 2025 at 9:44 PM EST

Before deciding whether to buy Lamb Weston or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Lamb Weston isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was good over the last three years, it’s expected to deteriorate over the next 12 months and its projected EPS for the next year is lacking. And while the company’s rising cash profitability gives it more optionality, the downside is its declining operating margin shows the business has become less efficient.

Lamb Weston’s P/E ratio based on the next 12 months is 19.1x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $66 on the company (compared to the current share price of $59.76).