Why You Can Buy Lamb Weston Stock On Its Post-Earnings Dip?

Lamb Weston (NYSE:LW) missed on both revenue and EPS when it reported Q3 results on April 4. This triggered a drop in its stock price and the selling momentum continued into Friday’s session, erasing all its year-to-date gains with a 26% loss. 

Investors are now wondering if this steep decline represents a buying opportunity or signals potential further downturns. In this scenario, adopting a cautious approach might be wise.  

Taking a look at the underlying causes of the miss and evaluating Lamb Weston’s capacity to address any concerns before buying shares could safeguard investors against possible continued declines. 

The Company Made A Major Change 

Tom Werner, the CEO of Lamb Weston, addressed the company’s ongoing transition from an outdated enterprise resource planning system to a new SAP platform during the company’s post earnings conference call. Werner explained that this shift led to unexpected issues with inventory visibility, resulting in shipping delays and canceled orders, which in turn caused lower sales volumes and margins. 

While acknowledging the difficulties, Werner emphasized that these changes are aimed at enhancing operational efficiency. However, he also cautioned that this is merely the initial phase of a multi-year transition process.  

Given this context, investors are encouraged to closely monitor the company’s performance over the coming quarters to verify that these integration challenges are being effectively managed and resolved. 

The Customer Is Under Pressure 

Werner also cited a decrease in consumer dining out as another factor contributing to the company’s decline in sales volume. In response, the management has revised its forecast, now expecting a mid-single digit decline in volume for the upcoming quarter, a shift from its previous projections of modest growth. 

This adjustment underscores the ongoing impact of inflation, as consumers struggle to justify higher menu prices, a trend the company anticipates will continue. Werner highlighted that once prices increase, they seldom decrease, especially as restaurants face their own challenges from rising wages and production costs.  

Investors should thus remain vigilant, taking a “trust, but verify” mentality as Lamb Weston navigates through economic pressures that are industry-wide.   

Lamb Weston Is Still A Buy, It’s Just Less Of A Buy 

Watching your stock plummet by 26% in less than two days is alarming for any investor, but the hours and days following a sharp selloff is not the time to be making any hasty decisions. Despite Lamb Weston’s near 15% earnings shortfall, its earnings through the first three quarters of the fiscal year have climbed by 23.6% compared to the same period last year. Remarkably, the $4.28 earnings per share (EPS) reported year-to-date is close to the total EPS of the entire previous fiscal year. 

Furthermore, Lamb Weston has revised its full-year EPS forecast to between $1.49 and $1.51. Even at the lower end, this would mark a 27% increase from last year. Considering the stock’s 26% decline year-to-date, this presents a potential buying opportunity. 

Additionally, despite the recent earnings miss, analysts remain optimistic. The day following the earnings report, major firms like Stifel Nicolas, Bank of America, and Wells Fargo adjusted their price targets downward yet maintained Buy or Overweight ratings. All these revised targets are still substantially above Lamb Weston’s closing price as of April 5, suggesting potential upside.