Lamb Weston

Lamb Weston's fiscal 2026 fourth-quarter sales were up 4% (constant currency) to $1.8 billion as higher volume offset an unfavorable price/mix. Adjusted EBITDA margin contracted 121 basis points to 16.3%. Results were weighed down by weak QSR traffic and excess industry capacity in EMEA.

Why it matters: North America is Lamb Weston's larger and more important segment, accounting for 66% of fiscal 2026 revenue. So, ongoing recovery bodes well for the firm but is masked by the ongoing challenges in Europe. We think the company is taking appropriate steps to remedy its situation. North America continued to show progress, as volume grew 11% despite flat traffic at QSRs, offsetting a 2% price/mix decline. With utilization above 90%, we think the firm is well positioned for upcoming negotiations for fiscal 2027 that should allow it to rely less on price cuts to win volume. While challenges in Europe remain substantial, we're encouraged by the steps the company is taking, including reducing acres in the region and capacity rationalization. Management expects these steps to bring utilization rates back into a range that should improve profitability.

The bottom line: We don't expect a significant change to our fair value estimate of $65 per share for narrow-moat Lamb Weston, as the results and guidance were largely within our expectations. Shares were up 1%, as the market seemed mildly encouraged by the improvement. We think shares remain undervalued, as we think the market is discounting a budding recovery. However, with management stating that capacity rationalization is happening industrywide, we think we're at the beginning of an improved competitive environment. For fiscal 2027, Lamb Weston expects sales to be flat to up 1%, better than the 1% decline in our earlier forecast. However, our adjusted EBITDA forecast sits within guidance for $1.1 billion to $1.2 billion, so the better topline outlook shouldn't affect our fair value estimate.

For more information on our outlook, please see our Stock Pitch on Lamb Weston.

After reviewing fourth-quarter fiscal 2026 results, we have maintained our fair value estimate of $65 per share. Our fair value estimate implies 21 times adjusted price/earnings and 11 times enterprise value/adjusted EBITDA off our fiscal 2027 estimates.

Lamb Weston's third-quarter sales were flat (constant currency) at $1.6 billion as lower price/mix offset higher volume. Adjusted EBITDA margins contracted 660 basis points to 17.4%. Full-year net sales guidance narrowed to $6.45 billion-$6.55 billion and adjusted EBITDA of $1.08 billion-$1.14 billion. North America showed progress, as 12% volume growth offset a 7% price/mix decline despite a weak QSR backdrop. But the international segment remained challenging, with constant-currency sales down 9%. Still, we see signs of a cyclical recovery, albeit at a frustratingly slow pace.

For fiscal 2027, we forecast sales to decline 2% to $6.5 billion, as the loss of a 53rd week (included in fiscal 2026 results) and continued challenges in International offset recovery in North America. Over the next decade, we forecast organic revenue growth of about 3% per year on average. This primarily comes from volume growth, which is roughly in line with industry forecasts. Near-term low-single-digit price cuts partially offset inflation-level price increases over the long term, resulting in 1% average price growth over our 10-year forecast period.

For the North American market, we forecast low-single-digit long-term volume growth from recovery in QSR traffic. We forecast similar volume growth in the international market, buoyed by rising per capita consumption. This represents a continuation of long-term global growth in French fry volume, excluding pandemic-related disruption. For both markets, we see a lack of pricing power leading to inflation-level price increases.

At midcycle, we forecast adjusted EBITDA margin to recover to about 22%, as the lack of pricing power prevents it from returning to prepandemic margins of about 24%. High-capacity utilization, cost cuts from the Focus to Win strategic plan, leverage across overhead expenses, and the end of price investments increases should drive the recovery. We do not expect margins to expand beyond that, given the commoditized nature of Lamb Weston’s products and the strong buyer power of some of its customers.

We forecast roughly 1.2% of sales for research and development as well as marketing. This is notably lower than most food producers, as the company’s reliance on selling to businesses rather than consumers leads to a notably lower need for marketing spending. On the opposite end, we forecast about 6.2% of sales for capital expenditures on average over the next 10 years, which is higher than many food companies, given the capital intensity of Lamb Weston’s business.

We incorporate one ESG risk based on the social effect of its fare in our forecast. We see some risk around the healthfulness of its products, contributing to our low-single-digit organic volume growth in Lamb Weston’s mature markets, which could be higher, all else equal.

We assign Lamb Weston a narrow economic moat rating based on cost advantage.

Returns on invested capital, including goodwill, averaged about 19% from fiscal 2016 to fiscal 2019. Even as the pandemic drove restaurant traffic down sharply, returns fell to about 10% but remained well above our 7% estimate for the firm’s cost of capital. As pandemic restrictions ended, Lamb Weston’s ROICs recovered to 15% by fiscal 2023. Amid near-term challenges with softening restaurant traffic and excess industry capacity, ROICs plunged below 8% but still remained above the cost of capital. Longer term, we forecast returns to recover to the midteens range by the end of our 10-year forecast period.

Lamb Weston’s cost advantage stems from its potato supply sources in its North American segment (66% of revenue and 91% of precorporate adjusted EBITDA in fiscal 2026). About 60% of its potatoes come from the Columbia Basin, which stretches across Washington, Oregon, and western Idaho. The Columbia Basin is prolific for growing potatoes thanks to its unique soil, steady irrigation from the Columbia River, and long sunny days matched with cool evenings. The rest of North American potato production sits at a similar latitude but east of the Columbia Basin. In general, as production goes east, conditions become less ideal, lacking the Columbia Basin’s soil, irrigation, and weather advantages. Another 20% comes from Idaho, which has similar growing advantages. Under ideal conditions, high yields lead to 10%-20% lower per-pound costs. The remaining 20% of Lamb Weston’s North American supply comes from Alberta and the Upper Midwest, which don’t generate the same cost advantages but still provide additional supply and some diversification.

We do not think it enjoys a similar cost advantage in its international segment (33% of revenue and 9% of precorporate adjusted EBITDA in fiscal 2026). This is evident in average adjusted EBITDA margins that were 13 percentage points lower than the North American segment over the past five years.

Lamb Weston does not grow most of its own potatoes, but we think its cost advantage in North America is durable for at least the next 10 years for a few reasons. First, the company has multiyear contracts (ranging from a few years to 10) with its farmers, many of which are set to automatically renew. Second, retention rates are very high as the company has rarely lost farmers to competitors. Third, potatoes are limited to 150-200 miles of shipping to maintain their quality. Lamb Weston’s existing processing footprint is overindexed to the Northwest United States, making it a natural buyer to that region’s potatoes. Lastly, we think the threat of new production in the Columbia Basin and Idaho regions is limited. Although there is land available, obtaining water rights from local regulators and municipalities for new agricultural production is very difficult, weakening the potential for a new supply in the region.

We no longer think Lamb Weston has an intangible asset in the form of entrenched customer relationships, particularly with national quick-service restaurants. Despite multidecade relationships with some of its largest customers like McDonald’s, Burger King, and Wendy’s, we do not think this results in pricing power or any other economic advantage. Most of these larger customers will deal with two or three suppliers through short- to medium-term contracts. However, the buying power of these customers leads to an inability for Lamb Weston to raise prices much more than inflation. Moreover, we do not think Lamb Weston would earn excess economic returns solely on intangible assets without its cost advantage.

For most food producers with moats, brand intangible assets are a common moat source. However, we think Lamb Weston’s primary focus on selling to other businesses (for example, QSRs) limits its ability to create a brand. Furthermore, it only holds the third- and fourth- bestselling North American brands in the retail channel well, behind Kraft Heinz’s Ore-Ida and McCain, according to Euromonitor. However, together with its private-label lineup, the company has the greatest share in frozen potato products at about one third of the market. While we do not think Lamb Weston carries a strong brand, we think it’s likely considered an important supplier to retailers, guaranteeing its space in the freezer aisle and providing another outlet for its products.

We refrain from assigning Lamb Weston a wide moat rating because of the uncertainty in the food landscape. A lack of switching costs and an overexposure to a single food product category creates enough uncertainty around the competitive advantage beyond 10 years. We'd consider lowering our rating to none if operational mistakes erode the economic benefits of the firm's competitive advantages.

Lamb Weston’s products generate high margins for restaurants, increasing loyalty and willingness to pay for consistency and quality.

Given the popularity of potato products, restaurants are willing to experiment with new innovations, creating future demand and greenfield potential.

Geographical cost advantages protect Lamb Weston from potential price wars while the quality of its products adds demonstrable incremental value to customers’ menus.

Poor execution, like the initial rollout of its new ERP system in fiscal 2024, can overshadow competitive advantages and lead to lost market share and profit margin erosion.

Lamb Weston’s overwhelming exposure to potatoes creates significant risk from short-term volatility, especially in the form of subpar growing seasons or crop disease, and long-term changes in consumer tastes.

Lamb Weston still competes in a commodity industry, so it faces risk from excess industry capacity. Moreover, it lacks pricing power.