Activist hedge fund Starboard Value reported that it has taken a significant stake in food-processing company Lamb Weston (LW) and is urging the company to cut its costs by $500 million by fiscal 2028, Bloomberg reported. The french fry maker, which currently has a 3.4% dividend yield, has already said that it would look to cut its expenditures by $250 million by 2028.
However, given Starboard's mixed record in recent years, along with Lamb Weston's very low growth and its significant negative exposure to GLP-1 weight-loss drugs, I do not recommend that investors buy LW stock at this point.
About Lamb Weston
LW sells frozen potato products to supermarkets and restaurants, including fast-food outlets. One of its key offerings is french fries.
In LW's fiscal second quarter, its sales rose 1% versus the same period a year earlier to $1.62 billion, while its income from operations, excluding certain items, sank 4% year-over-year to $182.8 million. Analysts on average predict that its earnings per share (EPS) will sink 17.6% during its current fiscal year, which ends in May. During the following fiscal year, the mean estimate calls for a 12.3% increase in its EPS. However, its top line is expected to drop 1.4% during that year.
Lamb Weston has a forward price-to-earnings (P/E) ratio of 16.1x and a market capitalization of $6 billion. As of the market close on March 10, shares had fallen 11.5% in the previous month, and they had dropped 25% in the previous three months.
Starboard's Mixed Record in Recent Years
In the last three years, the hedge fund's top-20 holdings generated an annualized return of just 2.86%, while its top 50 holdings produced an annualized profit of 4.09% during the same time. And importantly, its weighted top-20 names consistently underperformed the S&P 500 Index ($SPX) from the second quarter of 2024 until last quarter.
Bloomberg noted that Starboard's main fund returned under 5% in 2024. Also in 2024, Starboard was unable to push its agenda through at Autodesk (ADSK), News Corp (NWS), and Pfizer (PFE), the news service pointed out. Investors should consider that Lamb Weston may reject Starboard's ideas, at least for awhile.
GLP-1 Drugs Could Be a Headwind for LW Stock
According to a survey published in December 2024, GLP-1 users spent less at fast food chains, while they also shelled out less for "impulse purchases" at grocery stores. Since LW appears to obtain a significant percentage of its revenue from fast-food chains, its financial results may have been hindered by the proliferation of the weight-loss drugs, and the latter potential trend could meaningfully intensify going forward.
Similarly, because french fries are generally not considered healthy, GLP-1 drugs may be meaningfully lowering the amount of french fries that consumers buy at supermarkets, and that phenomenon could become more pronounced over the longer term if GLP-1 drugs become even more popular.
The Bottom Line on LW Stock
The company's forward P/E ratio of 16.1x is not especially attractive, in light of its status as a defensive stock, its lack of meaningful growth, and the ongoing threat that it faces from the GLP-1 drugs. Consequently, LW does not currently look appealing for investors.
On the date of publication, Larry Ramer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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