This week we had one company reporting earnings - Lamb Weston Holdings (LW). We are raising our price target on Signet Jewelers (SIG) to 42 from 35. DuPont (DD) shares are under review as they trade above our 75 price target. DuPont shareholders have until January 27th to decide whether to tender their shares for IFF shares in the Nutrition & Biosciences divestiture transaction.
Earnings Reports:
Lamb Weston Holdings (LW) – As the largest producer of frozen potato products (mainly French fries) in North America, Lamb-Weston’s revenues fell sharply when fast-food and other restaurants closed during the pandemic. We believe “Lamb” is a sturdy company, conservatively financed, with a strong market position among fast food restaurants (McDonald’s is a 10% customer, for example) and other food service venues. LW shares remain undervalued. Once the sales-reducing effects of the pandemic are in the past, we believe the market will more fully recognize the company’s value.
Lamb reported reasonable fiscal second quarter results. Revenues of $896 million fell 12% from a year ago (including the effect of fewer shipping days this quarter), while income from operations of $140 million fell 28%. Per share earnings of $0.66 was 31% below a year ago. Revenues were in-line with consensus estimates while per share earnings were about 6% higher than estimates.
Sales in the Global segment (about 53% of total sales), which includes the top 100 North American fast-food and full-service restaurant chains and all of Lamb’s international operations, fell 12% due to pandemic-related closures and lower traffic. Volumes fell 11% while pricing fell 1%. We anticipate sales and profits in this segment will rebound once the weather turns warmer and more people are vaccinated.
Food service revenues (about 27% of total sales) fell 21% due to weak traffic at smaller restaurants as well as hotels, schools, sports and entertainment facilities. We anticipate that most but perhaps not all of this volume will eventually return. Retail revenues (about 20%) rose 7%.
Most of the decline in earnings was driven by the decline in revenues, given Lamb’s fixed-cost production model. Pandemic-related costs and a modest increase in input and manufacturing costs, and the ramp-up of a new enterprise-wide software platform, weighed on profits as well. Management commented that, overall, their potato supply and contracts remain stable.
Lamb produced healthy free cash flow in the quarter, as lower capital spending partly offset lower profits. Net debt of about $2 billion was about $200 million lower than the May 31st fiscal year-end. Its cash balance of $764 million remains robust. Lamb said it will resume share repurchases this month, and (as reported earlier) raised its annualized dividend by 2 cents.
Overall, the turnaround at Lamb remains on-track and closely tied to the pandemic recovery.
Ratings Changes:
We are raising our price target on Signet Jeweler (SIG) to 42 from 35, as there are more fundamental improvements ahead for the company.
Friday, January 8, 2021 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.
Today’s podcast is about 11 minutes and covers:
- Brief updates on:
- Lamb Weston Holdings (LW) – reported reasonably decent earnings given the pandemic. The turnaround remains on-track.
- Signet Jewelers (SIG) – raising our price target to 42 from 35
- DuPont (DD) – exchange offer for IFF shares related to the Nutrition & Biosciences sale is open until January 27th. We are reviewing this name as it is trading above our 75 price target.
- BKR, MHK and JELD shares are approaching their price targets.
- General Motors (GM) – fourth quarter North America light vehicle sales, particularly trucks, were strong, with healthy pricing.
- Volkswagen (VWAGY) – maintained their market share in North America.
- Meredith Corp (MDP) – selling their Travel + Leisure business for $100 million.
- Credit Suisse (CS) – benefitting from surge in SPACs.
- Wells Fargo (WFC) – lifting of a 2015 consent decree suggests they are making progress in improving their compliance culture.
- Macy’s (M) – closing 45 stores as part of its 125-store closure program.
- Royal Dutch Shell (RDS/B), Baker Hughes (BKR) and Valero (VLO) will benefit from OPEC + Russia’s new production targets, at least for now.
- Elsewhere in the market:
- NYSE program to ban trading in some Chinese stocks creates a new category of risk for investors.
- The “Argentina Risk” for the United States – is that part of Bitcoin’s surge to $40,000?
- Final note
- Alabama and Ohio State in Monday’s national championship game.
Please feel free to share your ideas and suggestions for the podcast with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.