AlixPartners Engagement And Cost Savings Will Unlock Value

Key Takeaways

• Lamb Weston's cost optimization and restructuring plans aim to enhance profitability by reducing complexity, improving operations, and cutting expenses.
  
• New partnerships, product innovation, and strategic adjustments in logistics and customer relations are expected to drive revenue growth and boost earnings.
  
• Declining restaurant traffic and competitive pressures may strain margins and impact Lamb Weston's revenue, with geopolitical uncertainties posing additional risks internationally.

Catalysts

Engages in the production, distribution, and marketing of frozen potato products in the United States, Canada, Mexico, and internationally.

• Lamb Weston is engaging with AlixPartners to develop an end-to-end value creation plan that focuses on business optimization. This initiative is expected to unlock both short-term and long-term value and boost profitability by improving operations and reducing complexity and cost. It could positively impact earnings and net margins.
  
• The company aims to achieve pretax savings of at least $55 million in fiscal 2025 and $85 million in fiscal 2026 through its restructuring plan, including cost savings from reduced selling, general, and administrative expenses and cost of goods sold. This will likely enhance net margins and overall profitability.
  
• Lamb Weston is expanding its customer base and contracts, with successful new partnerships and product launches, such as converting a large QSR to using frozen products. This strategy is anticipated to drive volume growth and increase revenue.
  
• The innovation pipeline is strong, with new products being launched, such as fridge-friendly fries and tots, which expand the addressable market. Continued product innovation is expected to support revenue growth through increased market penetration and customer retention.
  
• Strategic adjustments in contracting schedules, optimizing transportation, logistics, and storage, along with a focus on enhancing customer relationships and operating efficiency, are poised to improve operating income and boost earnings potential.

Lamb Weston Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lamb Weston Holdings's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $683.9 million (and earnings per share of $4.9) by about April 2028, up from $367.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, down from 20.1x today. This future PE is lower than the current PE for the US Food industry at 17.5x.
• Analysts expect the number of shares outstanding to decline by 1.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Lamb Weston Holdings Future Earnings Per Share Growth

Risks

• Weak restaurant traffic and declining QSR demand, especially in hamburger chains, could lead to lower sales volumes and reduced revenue in the short term.
  
• Price/mix declines due to competition and investments to sustain market share could pressure net margins and overall profitability.
  
• The company’s shift in potato contracting due to excess finished goods inventory could indicate lower capacity utilization and negatively affect earnings due to reduced operational efficiency.
  
• Potential industry capacity expansion, especially outside the U.S., could impact Lamb Weston’s pricing power and revenue growth if supply exceeds demand.
  
• The uncertainty around geopolitical factors, including tariffs and retaliatory measures, could lead to increased costs or reduced revenues in international markets.

Valuation

• The analysts have a consensus price target of $66.579 for Lamb Weston Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $82.0, and the most bearish reporting a price target of just $56.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.0 billion, earnings will come to $683.9 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $52.18, the analyst price target of $66.58 is 21.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.