Lamb Weston (LW)

Potato products company Lamb Weston (NYSE:LW) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 4.3% year on year to $1.52 billion. The company’s full-year revenue guidance of $6.4 billion at the midpoint came in 0.8% above analysts’ estimates. Its non-GAAP profit of $1.10 per share was 26.2% 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 sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $6.39 billion in revenue over the past 12 months, Lamb Weston carries some recognizable products but is a mid-sized consumer staples company. Its size could bring disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, Lamb Weston’s sales grew at an impressive 17.3% compounded annual growth rate over the last three years as consumers bought more of its products.

This quarter, Lamb Weston reported modest year-on-year revenue growth of 4.3% but beat Wall Street’s estimates by 2.4%.

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 implies its products will see some demand headwinds. At least the company is tracking well in other measures of financial health.

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 9.5%. In the context of its 17.1% average organic revenue growth, we can deduce that the company’s gains have been evenly split between price increases and more customers purchasing its products.

In Lamb Weston’s Q1 2025, sales volumes jumped 9% year on year. This result was in line with its historical levels.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.

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 25.7% gross margin over the last two years. That means Lamb Weston paid its suppliers a lot of money ($74.30 for every $100 in revenue) to run its business.

In Q1, Lamb Weston produced a 27.8% gross profit margin, in line with the same quarter last year and exceeding analysts’ estimates by 9.1%. Zooming out, Lamb Weston’s full-year margin has been trending down over the past 12 months, decreasing by 3.8 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).

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

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 13.4%. 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 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.

This quarter, Lamb Weston generated an operating profit margin of 16.4%, up 1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Lamb Weston’s EPS grew at a spectacular 24.6% compounded annual growth rate over the last three years, higher than its 17.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, Lamb Weston reported EPS at $1.10, down from $1.20 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Lamb Weston’s full-year EPS of $3.27 to grow 5.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Lamb Weston broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders. 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 2.6 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 burned through $19.8 million of cash in Q1, equivalent to a negative 1.3% margin. The company’s cash burn slowed from $229.5 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Lamb Weston’s five-year average ROIC was 14.5%, higher than most consumer staples businesses. This illustrates its management team’s ability to invest in profitable growth opportunities and generate value for shareholders.

Lamb Weston reported $67.5 million of cash and $4.25 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 $1.22 billion of EBITDA over the last 12 months, we view Lamb Weston’s 3.4× net-debt-to-EBITDA ratio as safe. We also see its $81.5 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. Zooming out, we think this quarter featured some important positives. The stock traded up 3.6% to $56.09 immediately after reporting.

Updated: May 21, 2025 at 10:39 PM EDT

Are you wondering whether to buy Lamb Weston or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Lamb Weston isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was good over the last three years, it’s expected to deteriorate over the next 12 months and its declining operating margin shows the business has become less efficient. And while the company’s volume growth has been in a league of its own, the downside is its low free cash flow margins give it little breathing room.

Lamb Weston’s P/E ratio based on the next 12 months is 15x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $66.01 on the company (compared to the current share price of $51.36).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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