LAMB WESTON HOLDINGS INC LW
August 11, 2024 - 5:42pm EST by
HonkyRed
2024 2025
Price: 60.14 EPS 0 0
Shares Out. (in M): 144 P/E 0 0
Market Cap (in $M): 8,640 P/FCF 0 0
Net Debt (in $M): 3,897 EBIT 0 0
TEV (in $M): 12,537 TEV/EBIT 0 0

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Description

Investment Overview: An Oct’23 post gives a good overview of the Company, the industry structure (~3 player market), etc. Stock has almost been cut in half in the last 6 months from a combination of self-inflicted issues (troubled ERP implementation, share losses) and more recently/consequential, the 1:2 punch of declining end-consumer/QSR demand and unfortunately they and their main two competitors have significantly ramped supply, effectively coincident with a demand drop-off. Could be early, but feels like a blueprint for a Marathon Partners “Capital Cycle” investment. Investors can get paid by either a reversion of depressed demand and/or a supply response – the latter seems more realistic in the near-term 

 Supply/Demand: Industry has been at/above capacity utilization for a number of years, but has significantly loosened with heavy supply additions and unprecedented demand declines. Versus 35.2b pounds of capacity in ’23, 9% capacity growth by the end of 2025 (+3.2b pounds, plus another 1.7b pounds in 2026/2027). The net is that utilization 99-100% is now 89% trending to 86-7% in 2025/2026. LW utilization is below the industry average (at/below 80%?) given share losses, operational issues last year. LW has 8.2b of capacity. In talking to the Company, I think it’s reasonable to expect that they could permanently close 1 or potentially 2 plants in the coming months – importantly, it’s clear they will not sit still – 1-2 closures likely takes 300-600k lbs out or 4-7% reduction of LW supply and gets utilization into the mid-80s. Upside case is other two private players similarly react on the supply side (McCain and Simplot), both of which seem financially prudent and have some older capacity that could be reduced. Demand recovery is TBD – the MSD% declines seen today is somewhat unprecedented and compares to LT growth of 3%. It’s hard to pinpoint the exact drivers of demand declines – people will point to GLPs, but the penetration rate can, at best, can only be responsible for a small fraction of the decline seen. The biggest driver of demand pressure is likely the pressure on the low-end consumer and >30% of cumulative QSR inflation versus 2019. Fries are the highest margin product at QSRs and MCD/BK are pushing more affordable offerings, including $5 meals. LW is making some modest pricing concessions, mainly to regain share from losses during ERP snafu. Risk exists that it is a race to the bottom, but in the GFC pricing held flattish and the last large supply/demand imbalance occurred during the early 1990s which drove the industry consolidation that exists today. And most importantly, signs are emerging of industry discipline

FCF/BS/Capital Allocation: FCF is pressured from high capex (this year’s CFFO < capex and dividend). B/S is okay, not great (2.7x, somewhat depressed EBITDA - $1.2b+ of liquidity). LY’s capex of $929m trending to $850m this year and likely going to $300m next year (well below consensus of >$600m). At those levels of capex, likely supports FCF next year of ~$800m (prior to 1x restructuring costs, which are welcome with plant shutdowns). At $800m, it would be close to a 10% FCF yield – 2.5% goes to div, likely some portion to repo, but will allow for deleveraging – have $3.9b of net debt

Valuation: Stock has derated from 25-30x EPS to 13x. Who knows what the right multiple is, but >20x is hard to underwrite. 17-18x F26 (May) EPS of $5 supports an $85-90 stock

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

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