Lamb Weston's Growth Is Underappreciated, BofA Says In Upgrade

Lamb Weston Holdings Inc LW has underperformed industry peers since peaking in November, and the stock's narrowing premium over fellow foodies fails to reflect its superior growth, according to Bank of America Merrill Lynch. 

The Analyst

Bryan Spillane upgraded Lamb Weston from Neutral to Buy and maintained a $85 price target.

The Thesis

BofA expects at least 4-percent organic sales growth and 8-percent bottom-line growth over the next two years. The latter represents a near-halving of previous growth rates but still outpaces peers, Spillane said in the Tuesday upgrade note. (See his track record here.) 

“We expect market concerns about potential margin compression to dissipate as strong demand and tight supply continue in FY20E,” the analyst said. 

Strong french fry demand and moderating drag from European agricultural shortages are catalysts, Spillane said. 

“We expect some improvement in FY20 as price increases and a new potato crop should relieve some of the pressure,” he said.

“We do not expect LW to pick up meaningful new business in Europe to be supplied in North America. Thus any activity would be upside in our view.”

BofA welcomes news of peer production expansions and anticipates full-capacity operations throughout the industry.

“This should be a tailwind for margins and support price discipline in the market place,” Spillane said. “In short, the industry needed someone to add more capacity.”

Price Action

Lamb Weston shares were up 0.4 percent at $67.77 at the time of publication Tuesday. 

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Photo courtesy of Lamb Weston.