Lamb Weston, Inc. 20% Sell Off Really Company Performance or Mr. Market?

Yesterday, Lamb Weston experienced a staggering 20% drop, plummeting from $102 to $80.96, and is currently trading around $79.82. This significant decline has sparked conversations among investors globally. What caused this drastic shift? Is Mr. Market driven by emotion? Are there signs of concern? Should investors be worried?

Let's delve into it!

Lamb Weston

To condense a lengthy narrative into a brief summary: No, there are no issues with Lamb Weston's company or products. The recent downturn in their stock value is primarily due to missing expected earnings and revising their guidance downward. This pattern is not unprecedented and shouldn't elicit undue fear. Many reputable companies, such as Apple, Microsoft, Fortinet, and Palto, have similarly adjusted their forecasts in the past.

Lamb Weston's strategic shift toward higher-margin business while cutting lower-margin ventures may temporarily impact quarterly results, causing concern among some investors. However, Lamb Weston has demonstrated resilience in its operations, and such earnings calls should not be indicative of its future prospects.

As a shareholder, I've capitalized on this opportunity to purchase additional stocks at a discounted price. My ownership stake has increased from 4% to over 7%, which I view as a favorable move.

Fundamentals

Fundamentally Lamb Weston still has a strong balance sheet. Their revenue is driving up and their margins are improving.

As you can see in the graph above, Lamb Weston is still growing in all core sectors it operates in. With the shor-term earnings being misses, people leave behind the fact that Lamb Weston is still growing at a modest rate.

Lamb Weston also has a history of solid and steady ROIC, ROA and ROE (ROE being less stable). This indicates that Lamb Weston has the position to maintain or even bring up prices, giving it pricing power. The brand is also known in a lot of fastfood chains and restaurants around the world. People all over the world use their products at home, at dining, going out and much more.

Lamb Weston's margins are robust! In 2023, Lamb Weston shifted its focus towards higher-margin operations. I anticipate that we will witness results akin to those of 2019 in the forthcoming years, characterized by high and sustainable margins.

Conclusion

Lamb Weston stands as a sturdy company with a proven track record of performing well even amidst uncertain circumstances. While their balance sheet is solid, there's room for improvement regarding debt management. Nonetheless, Lamb Weston has a firm foundation for further expansion and growth.

Recovering from the recent 20% dip will undoubtedly take time. However, I perceive this as a fantastic opportunity to increase my position. Presently, I am content with my investment, but I may consider scaling up in the future.

Despite the recent earnings miss and downward guidance, I remain unworried. Lamb Weston maintains its status as a steadfast company firmly grounded in reality.

I anticipate Lamb Weston will continue to excel and meet my expectations. Ultimately, it operates within the consumer sector, where achieving tech-like results across the board is unrealistic.