3 Reasons LW is Risky and 1 Stock to Buy Instead

Over the past six months, Lamb Weston’s shares (currently trading at $53.25) have posted a disappointing 9.6% loss, well below the S&P 500’s 5.3% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Lamb Weston, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Lamb Weston Not Exciting?

Despite the more favorable entry price, we don't have much confidence in Lamb Weston. Here are three reasons why you should be careful with LW and a stock we'd rather own.

1. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Lamb Weston’s revenue to stall, a deceleration versus This projection is underwhelming and implies its products will face some demand challenges.

2. Shrinking Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Looking at the trend in its profitability, Lamb Weston’s operating margin decreased by 6.2 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 10.3%.

3. Breakeven Free Cash Flow Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Lamb Weston broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders. The divergence from its good operating margin stems from its capital-intensive business model, which requires Lamb Weston to make large cash investments in working capital and capital expenditures.

Final Judgment

Lamb Weston isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 14.9× forward P/E (or $53.25 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of our top software and edge computing picks.

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