It's difficult to find good performers in this market. This is especially true when looking at companies that are not fundamentally robust. One great example of this can be seen when looking at Lamb Weston Holdings (NYSE:LW). Recent financial performance achieved by the company has resulted in shareholders pushing the company higher. But between how financial performance has been for the rest of the year and management's own forecast for the remainder of the 2022 fiscal year, the company is looking rather pricey. In the best scenario, you might be able to argue that the stock in this company is fairly valued. But in some ways, shares are looking like they are nearing overvalue territory.
Back in March of this year, I wrote an article detailing the investment worthiness of Lamb Weston. In that article, I said that the company, as it was priced at that time, provided investors with an unfavorable risk-to-reward scenario. I did say that the company was not a bad prospect for long-term investors, but my overall conclusion was that the company didn't offer investors anything significantly positive. As a result, I ultimately rated the business a ‘hold’, which meant that I felt financial performance would follow the market over an extended timeframe. Since then, I have been surprised by the trajectory that shares have taken. Even though the S&P 500 is down by 16.4%, shares of Lamb Weston have skyrocketed by 20.9%.
Given this massive return disparity, you might think that some big deal happened. An example would be an acquisition or something of that nature. However, no such event has taken place. Instead, the increase in price the company experienced seems to be largely related to financial performance achieved in the third quarter of the company's 2022 fiscal year. This is the only quarter for which we have data now, but did not have data in my last article. Prior to that quarter, the company had been experiencing a nice bit of upside in revenue for the year. Revenue growth in the first half of 2022 relative to the same time one year earlier was 12.6%.
Though not as strong, revenue growth in the third quarter came in at 6.6%, with sales climbing from $895.8 million in the third quarter of 2021 to $955 million the same time this year. This brought total revenue for the first nine months of the 2022 fiscal year up to $2.95 billion. That translates to a year-over-year growth rate of 10.6%. Although the company experienced some improvement in its Global segment, the largest growth came from its Foodservice segment. Sales here grew by 34% year over year, largely as a result of a 22% increase coming from price and product mix. However, the company also benefited to the tune of 12% from an increase in volume. As a major seller of potato products, it should come as no surprise that revenue would be higher this year, since the economy was still partially shut down last year.
Where the picture looks really confusing, however, is when we start looking at profitability. So far, 2022 has not been particularly kind for investors. However, the third quarter on its own was significantly better than the same time last year. Net income during that quarter came in at $106.6 million. That translates to a 61.3% increase over the $66.1 million achieved in the third quarter of 2021. Operating cash flow did worsen year over year, declining from $56 million to negative $33.5 million. But if we adjust for changes in working capital, it would have risen from $106.9 million to $142.5 million. Over that same time, EBITDA for the company also improved, climbing from $167.1 million to $219.6 million. Once again, this improvement for the company was largely attributable to the Foodservice segment. In fact, it was entirely attributable to it. Besides it, the best performing segment on the bottom line was the Retail segment, with profits falling 5% year over year. Meanwhile, the Foodservice segment reported a 52% rise in profitability. The same factors that drove revenue higher were also instrumental in improved margins in this category.
Due to this financial performance, the company did experience some improvement in its results covering the first nine months of its 2022 fiscal year. However, that does not change the fact that profitability metrics are still down. Net income of $168.9 million compares unfavorably to the $252.3 million generated the same time one year earlier. Operating cash flow dropped from $374.8 million to $174 million. On an adjusted basis even, this metric worsened, declining from $393.7 million to $364.2 million. Even EBITDA worsened, declining from $582.1 million last year to $523.9 million this year.
When it comes to the 2022 fiscal year as a whole, management claimed that revenue should rise at a rate that is greater than the company's long-term revenue target growth of the low to mid-single-digit range. But this should not be a surprise since this is the same kind of guidance the company had been giving earlier in the year. Management also said that while results for the latest quarter were positive, overall results for 2022 we'll be painful. They said that for the remainder of the fiscal year higher potato, input, and transportation costs will combine to push net income and EBITDA margins down for the year. Unfortunately, management has not provided any real guidance for this. But if we annualize results experienced in the first three quarters of the year, we should anticipate net income of $212.7 million, adjusted operating cash flow of $470.6 million, and EBITDA of $673.6 million.
If these estimates come to fruition, shares of the company will look rather pricey. The price to earnings multiple, for instance, will come in at 44.5. This compares to the 29.8 multiple we get if we rely on 2021 results. The price to adjusted operating cash flow multiple should increase from 18.6 to 20.1. And the EV to EBITDA multiple should increase from 15.7 to 17.5. Interestingly, the financial performance of the company, using its 2021 results, makes the firm look more expensive than when I last wrote about it. But using the 2022 figures, shares look cheaper now. This is due to the fact that my own forecast for financial performance for the 2022 fiscal year improved, while the increase in share price made the company more expensive compared to what the business generated in 2021. To put the pricing of the company into perspective, I decided to compare it to the same five firms that I compared it to in my last article. On a price to operating cash flow basis, these companies ranged from a low of 5 to a high of 73.6. When it comes to the EV to EBITDA approach, the range was from 2.9 to 34.8. In both cases, two of the five companies were cheaper than Lamb Weston. Meanwhile, using the price-to-earnings approach, the range was from 5.6 to 131. In this scenario, four of the five companies were cheaper than our prospect.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Lamb Weston Holdings||44.5||20.1||17.5|
|Sanderson Farms (SAFM)||5.6||5.0||2.9|
|Cal-Maine Foods (CALM)||131.0||73.6||34.8|
|Hormel Foods (HRL)||26.5||20.9||18.3|
|McCormick & Company (MKC)||30.9||26.3||23.0|
|Flowers Food (FLO)||24.8||14.6||13.2|
The past couple of months have been fantastic for shareholders of Lamb Weston stock. Due to strong performance in the latest quarter, shares of the company have risen nicely. This comes even as management warns about the rest of the 2022 fiscal year. Due to how things are turning out, I do think that the company looks fundamentally better than I previously thought it would. But even in that case, shares look rather lofty. Because of this, I have decided to retain my ‘hold’ rating on the firm, even though I believe that near-term performance might suffer some.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.