On Friday, BofA Securities adjusted its outlook on Lamb Weston Holdings Inc . (NYSE: NYSE:LW), a leading supplier of frozen potato products. The firm reduced the price target on the company's shares to $113 from the previous $138 while maintaining a Buy rating. The revision follows Lamb Weston's third-quarter results for fiscal year 2024, which fell short of expectations due to challenges with its North America ERP rollout and a decline in global restaurant traffic.
Lamb Weston's recent earnings report revealed that ERP system issues impacted sales by approximately $135 million and adjusted EBITDA by around $95 million in the third quarter. Additionally, the company faced $25 million in inventory write-offs.
This led to an adjusted EBITDA of $344 million, with adjusted earnings per share (EPS) of $1.20, which was notably below BofA's forecast of $392 million in adjusted EBITDA and an adjusted EPS of $1.44. The outcome prompted a significant guidance reduction for the year and a subsequent 19% drop in the stock price.
Despite these setbacks, BofA Securities remains optimistic about Lamb Weston's prospects. The firm's fiscal year 2025 EPS estimates are only 8% lower at $6.25, and the price-to-earnings (P/E) multiple has been adjusted from 19.5x to 17.5x, with the EBITDA multiple moving from 12.5x to 11.5x. The adjustments reflect the current challenges faced by Lamb Weston and the overall market conditions.
BofA Securities believes that Lamb Weston remains an attractive investment within the packaged food sector. The firm anticipates that the ERP-related headwinds will be limited to the third quarter and expects that global restaurant traffic trends will normalize over the next 12 months.
BofA Securities also forecasts a sequential sales rebound for Lamb Weston while maintaining a stable gross margin, differentiating the current situation from past events that have negatively impacted the company's stock, such as the COVID-19 pandemic and the 2021 potato crop issue. The firm reiterates its Buy rating on Lamb Weston shares.
InvestingPro Insights
In light of BofA Securities' recent outlook adjustment on Lamb Weston Holdings Inc. (NYSE: LW), it's valuable to consider the latest data and insights from InvestingPro. With a current market capitalization of $11.77 billion and a P/E ratio standing at 13.49, Lamb Weston's valuation reflects a market that is recognizing its earnings power, especially when considering the adjusted P/E ratio over the last twelve months as of Q3 2024, which is an even lower 10.72.
Despite the challenges highlighted in the recent earnings report, Lamb Weston has demonstrated a robust revenue growth of 36.22% over the last twelve months, indicating a strong underlying business performance. This is further supported by a notable dividend yield of 1.77%, with the company having raised its dividend for 7 consecutive years—an InvestingPro Tip that aligns with the firm's positive long-term outlook.
Another InvestingPro Tip to consider is that analysts are anticipating sales growth in the current year, which could signal a recovery from the recent ERP system issues and a potential rebound in global restaurant traffic. With the stock trading at a low earnings multiple and near its 52-week low, there may be an opportunity for investors looking for value in the packaged food sector. For those interested in further analysis and additional InvestingPro Tips, Lamb Weston's profile on InvestingPro offers a total of 14 tips to help inform investment decisions.
As investors weigh these factors, they can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to in-depth financial data and expert insights that could prove invaluable in crafting a well-informed investment strategy.
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