Trade Of The Week

Lamb Weston (LW) $45.70 – Consumer – Packaged Foods

Fundamental Snapshot:  The $6.69B consumer goods company trades 19.7X earnings, 2.15X sales, and 40X FCF. LW has seen low-single digit growth the last two years and expecting 5.2% and 3.2% in 2017 and 2018 respectively to more than $3.25B. EPS is expected to climb over $2.30. LW was spun out of ConAgra in November and is a leader in the $13B frozen potato category, expected to grow to $15B by 2020. LW has just $3B in net sales, so a lot of room to gain share in a fragmented market especially Internationally where they are just 23% of the global market. The company is expanding sales offices and processing facilities across Europe, Asia, and Australia with hopes to build out their global footprint. Africa and the Middle East big opportunities with imports expected to see 17.8% CAGR through 2020 and China at 15.8% an attractive opportunity. LW is largest in North America and Europe with end-markets in chain restaurants, non-commercial establishments like schools and hospitals, and through private label sales from brands like Alexia. Their sales to large US-based chain restaurants accounts for 52% of overall sales. The company competes against brands like McCain, Simplot, Cavendish and Ore Ida, the latter owned by Kraft Heinz. LW is coming off a strong quarter with 5% revenue growth and better price/mix driving gains. Raw potato costs were flat Y/Y.

Open Interest, Volatility, and Skew: LW’s 30 day IV at 24.1% at the 20th percentile of its 52-week range of 16.6% to 54.5%.  Its January options are pricing in a 13.7% move by year-end, and total put/call open interest ratio at 1.43. Its 30 day IV skew of 0.0% compares bullish to a 52-week average of 0.0%.  Some notable positions include 3,000 July $40 calls, 1,200 October $45 calls, and short puts in the October $40 and $35 strikes.

Analyst Notes: Analysts have an average target for shares of $42.50 with 5 buy ratings and 3 hold ratings, CL King starting coverage on 5/23 with a Strong Buy rating and $55 target. Jefferies positive on 5/19 noting that the company should continue to be able to raise prices and their pricing power is underappreciated by the market as industry capacity remains constrained relative to demand. Berenberg started shares at Buy with a $49 PT on 5/16 seeing topline acceleration driven by price/mix improvements and international volume growth. The firm sees operational advantages for LW as their yields and quality are among the best globally which gives them a cost advantage vs peers.

Technical View: LW shares have traded in a strong trend since their spin-off and recently pulling back to the rising 50-EMA and prior breakout at $44. Shares have a channel target higher at $50.

Ownership Trends: Institutional ownership rose 0.22% in Q1 filings, 88 funds creating new positions, 106 adding, 76 closing, and 170 reducing. 9 funds hold LW in their top ten. Deccan Value is a top holder with 2.78M shares while Blue Ridge with 1.8M shares. 3G Capital owns a small 600,000 share stake. Short interest is 1.97%.

Catalyst: M&A, International Growth, Market Share Gains

Optimal Strategy: Long the LW October $45 Calls for $3.00 Debit

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