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Here's How Lamb Weston (LW) is Placed Ahead of Q2 Earnings

Zacks Equity Research

Lamb Weston Holdings, Inc. LW is slated to report second-quarter fiscal 2020 results on Jan 3. This global manufacturer, distributor and marketer of frozen potato products delivered a negative earnings surprise of 1.3% in the last reported quarter. Nonetheless, its earnings have outperformed the Zacks Consensus Estimate by 7.9%, on average, in the trailing four quarters.

The Zacks Consensus Estimate for fiscal second-quarter earnings has been steady at 85 cents over the past 30 days. This suggests an increase of 6.3% from the year-ago period’s reported figure. Further, the consensus mark for revenues is $964 million, indicating growth of 5.8% from the figure reported in the year-ago quarter.

Key Factors to Note

Lamb Weston has long been benefiting from robust price/mix and a focus on limited time offerings or LTOs. LTO innovation has been driving the company’s market share and particularly aiding volume growth in its Global segment. Notably, the Global segment accounted for more than half of Lamb Weston’s first-quarter fiscal 2020 sales and has been a major driver. During the last earnings call, management stated that it expects continued strength in this segment for fiscal 2020. This is likely to reflect in the performance of the quarter under review. The Zacks Consensus Estimate for Global segment sales is pegged at $498 million compared with $470 million reported in the year-ago period.

Lamb Weston’s efforts to boost offerings and expand capacity also bode well. Toward this end, the buyouts of Marvel Packers and Ready Meals have been aiding volume growth. Also, the acquisition of joint venture interests in Lamb Weston BSW has been a tailwind to the bottom line. In fact, management expects contributions of approximately $10 million to earnings from this buyout during the first half of fiscal 2020. Such efforts have been helping the company effectively meet the rising demand for snacks and fries.

However, Lamb Weston has been witnessing cost increases for input materials like raw potatoes as well as higher manufacturing expenses stemming from inefficiencies and depreciation associated with its french fry production line in Oregon. Also, the company's SG&A expenses have been rising year over year for the last few quarters. Management expects a rise in SG&A costs for fiscal 2020 due to planned investments to upgrade the ERP system. These factors, along with elevated input and manufacturing costs, may have negatively impacted Lamb Weston’s bottom line in the second quarter.

What the Zacks Model Unveils

Our proven model does not conclusively predict an earnings beat for Lamb Weston this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Lamb Weston carries a Zacks Rank #2, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks With Favorable Combinations

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat:

Tyson Foods TSN currently has an Earnings ESP of +5.00% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Post Holdings POST currently has an Earnings ESP of +13.79% and a Zacks Rank #3.

Hain Celestial HAIN presently has an Earnings ESP of +6.67% and a Zacks Rank #3.

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