Lamb Weston: A Simple-To-Understand Business With A Market-Beating Yield

Company Overview - Lamb Weston Holdings Inc. is a leading American food company specializing in frozen potato products, with a market cap of $9 billion [1] - The company operates in two segments: North America (67% of FY 2024 revenue) and International (33%) [1] - McDonald's Corp. is the largest customer, accounting for 14% of total net sales [1] Dividend Growth - The company has increased its dividend for eight consecutive years since becoming independent in 2017 [2] - The five-year dividend growth rate is 7.9%, with a recent increase of 28.6% [3] - The current stock yield is 2.3%, which is 110 basis points higher than its five-year average, and the payout ratio is 28.9% [3] Revenue and Earnings Growth - Revenue grew from $3.2 billion in FY 2017 to $6.5 billion in FY 2024, representing a compound annual growth rate (CAGR) of 10.7% [4] - Earnings per share (EPS) increased from $2.22 to $4.98 during the same period, with a CAGR of 12.2% [5] - Recent challenges include a botched ERP transition and excess supply in the market, leading to a significant drop in stock price [5] Financial Position - The long-term debt/equity ratio is 1.9, and the interest coverage ratio is nearly 8, indicating a decent financial position [6] - Return on equity (ROE) averaged 269% over the last five years, with a net margin of 10.8% [6] - The company benefits from economies of scale and strong customer relationships, providing durable competitive advantages [6] Valuation - The stock is currently trading at a P/E ratio of 12.4, significantly lower than its five-year average of 23.4 [7] - A dividend discount model analysis estimates a fair value of $61.92, indicating the stock may be undervalued [11] - Professional analysis firms rate the stock as a 4-star "buy," with target prices of $70.00 and $95.00 from CFRA and Morningstar, respectively [13][14] Investment Opportunity - The recent stock price drop of nearly 50% presents a potential buying opportunity for long-term investors [5][15] - The company has a low payout ratio and a history of dividend increases, making it an attractive option for dividend growth investors [15]