The Consumer Staples sector is now the third-highest P/E slice of the S&P 500. With a forward earnings multiple near 20, there is clearly a premium being placed on low-risk, high-cash flow firms that are seen as more stable than risky cyclical banks and non-profitable tech.
Lamb Weston (NYSE:LW) fits that bill – it shows strong momentum and a high current and forward P/E. I think it’s a buy as a high relative strength stock, but the long-term valuation is indeed stretched.
Staples P/E Stretched?
According to Bank of America Global Research, Lamb Weston was spun off from Conagra Foods (CAG) in November 2016. LW is the leading manufacturer of frozen potato products, with over $3.5bn in annual revenues. The company is #1 in North America and #2 globally. LW generates approximately 80% of sales in the US and Canada and 20% in international markets.
The Idaho-based $14.2 billion market cap Food Products industry company within the Consumer Staples sector trades at a high 29.8 trailing 12-month GAAP price-to-earnings ratio and pays a small 1.2% dividend yield, according to The Wall Street Journal.
LW has strong pricing power amid still-high food inflation. Also, shares have outperformed amid the risk-off atmosphere with money flowing into Staples. Back in January, Lamb Weston reported a strong earnings beat and topped analysts’ revenue estimates. Global segments reported strong numbers, helping to lift EPS.
On valuation, analysts at BofA see earnings rising sharply this year with continued strong per-share profit trends seen through 2025. BofA even recently made the case that $6 of EPS could be in the works for this spuds stock. But sticking with the more conservative Bloomberg consensus, $3 is more likely in 2023 with robust growth in ’24 and $4.50 of EPS by 2025, in line with what BofA sees. Dividends, meanwhile, are expected to grow at a modest clip, so the yield should remain low.
Both LW’s operating and GAAP P/Es are forecast to be elevated, above 20, and shares trade at a premium EV/EBITDA ratio, but the firm sports strong profitability and positive free cash flow. The stock appears expensive across the valuation picture, but it has traded at high valuation multiples over the past five years. Consider, though, that the forward PEG is just 0.83. If we assume 8% earnings growth over the coming years, the PEG is not all that attractive above 2, so I see shares as fundamentally overvalued.
LW: Earnings, Valuation, Free Cash Flow Forecasts
Looking ahead, corporate event data from Wall Street Horizon show a confirmed Q3 2023 earnings date of Thursday, April 6 BMO with a conference call later that morning. You can listen live here.
Corporate Event Risk Calendar
The Technical Take
LW just recently notched an all-time high above its pre-pandemic peak of $96. Notice in the chart below that shares are now throwing back to that breakout point, and I believe it is a critical area to hold. There is a gap immediately underneath $96 down to the high $80s which should support a pullback. What’s more, that is where the rising 200-day moving average will come into play.
There’s yet another layer of support in the mid-$80s from the early 2021 range highs. With the stock trading at $97, I assert that a long position with a stop under $85 makes sense given the confluence of support zones under the current price. LW should be considered a momentum name in a portfolio. A risk, however, is that there’s bearish RSI momentum divergence right now, a fall back into the high $80s would set up an even better risk/reward long play.
LW: A Few Areas of Support, Watching Bearish RSI Divergence
The Bottom Line
It’s hard to make a pure value case on LW, but its earnings growth is impressive and price momentum is high. It’s a near-term buy to me as a growth and momentum play.