Lamb Weston & Its Spin off from ConAgra Foods

Recently, I had the privilege to come across two books written by Gotham Capital founder Joel Greenblatt titled "You Can Be A Stock Market Genius" and "The Little Book That Beats The Market". After reading both over the past two weeks I definitely enjoyed "You Can Be a Stock Market Genius" to be the best of the two. Mr. Greenblatt opened my eyes to a few areas I'm completely unfamiliar with including Spinoffs, LEAPS, and Restructuring's just to name a few. It's definitely worth the read and I recommend it to anyone in the investment field. For a while I have been simply focusing on searching for undervalued companies and occasional option trades. The book hands down will provide some valuable information on other areas to search for investment returns. I found the Spin-off section extremely intriguing and that is what brings us to this post.

Currently a major spin-off is about to take place between ConAgra Foods and its frozen potato business Lamb Weston. ConAgra Foods owns and operates popular packaged food companies such as Snack Pack, Healthy Choice, Hunt's, Egg Beaters, Reddi-Whip, Slim Jim and Hebrew National. For the past two years it has been undergoing major changes to its business including selling some of its businesses and acquiring new companies... Following some of my newly picked up spin off knowledge from Mr. Greenblatts book I'm going to attempt to provide some analysis on Lamb Weston. Im going to attempt to keep it more basic. Ive never attempted to analyze a spinoff and realize there maybe some holes in my thesis, but everyones gotta start somewhere. Following some of Mr. Greenblatts knowledge from his book the goal is to see whether Lamb Weston could prove to become a valuable investment with a bargain price.

Lamb Weston is a leading global producer, provider, marketer of value-added frozen potato products.

Facts:

  • French Fries represent majority of products portfolio
  • #1 in North America frozen potato products by market share
  • Largest Customers: McDonalds (roughly 12% of total sales), Arbys, Chick-Fil-A, Dunkin Donuts
  • 22 factories between NA, Europe, China. 1 under construction in Russia. 
  • Does business in over 100 countries and has 6,000+ employees.
  • Frozen potato industry is roughly 13 billion. LW has roughly 23% market share
Terms of Spinoff:
  •  tax free
  • 3 Shares of ConAgra will get you 1 share of newly public Lamb Weston
  • Roughly 146 million of shares are expected to be outstanding
  • Record date : Nov. 1
  • Distribution Nov. 9
  • Listing symbol for Lamb Weston - LW

1. Will current major stockholders be interested in Lamb Weston? Currently ConAgra major holders include : 

                                                    Shares

                                                                shares

Right off the bat, one can conclude the interest of owning ConAgra individually compared to Lamb Weston (LW) individually is significantly different. ConAgra has a large diversified portfolio of different branded products where as LW manages and operates in the frozen potato industry. LW lacks the diversification that ConAgra offers with its multiple products. Simply put, one could assert LW being more risky since it only offers one major product. But LW did account for 25% of ConAgra's net sales in 2016... Thats a lot... ConAgra is spinning off a good chunk of sales. Another reason that could make LW more risky and less attractive to current major holders is its business is subject to weather and crop season effects which can drastically change the financial results of the business. Not to mention currency valuations due to its global presence and the company would now be completely on its own and have to bear all costs regarding the business. 

Also, some major stockholders and institutions are required to own only certain companies that are in an index for example the S&P 500. Some have rules that restrict them from owning companies outside of an index let alone owning companies with a minimum market cap. In this case Lamb Weston would not be placed into the S&P 500 index and therefor could be subject to some harsh selling in the beginning due to funds offloading their acquired shares because of restrictions.

All these reasons present scenarios in which Lamb Weston could become an attractive investment opportunity due to the selling from institutional holders who have no interest in the individual company or can't keep their shares thus possibly creating an undervalued price.

Insiders want it?

In the words of Mr. Greenblatt " the more stock incentive the better". 


From reading the Form 10 Lamb Weston plans on adopting an executive compensation plan similar to that of ConAgra with incentives for short and long term performance which can could provide insiders with a boost for achieving strong results and stock performance. Thomas Werner a 17 year veteran at ConAgra who was President of Commercial Foods will become LW's CEO and President.

Numbers:

For the last 3 years LW had : 


Analyst project Lamb Weston to be valued around 29$ share which would create a market value of roughly 4.2 billion (146m x $29).  With roughly 2.2 billion in assets and 3 billion in debt Lamb Weston would prove to be much more leveraged compared to ConAgra after the spinoff (roughly 11b in assets 7 billion in debt). This would also serve as another reason as to why current ConAgra shareholders may want to get rid of there new LW shares which could present a undervalued opportunity. 

I find Lamb Weston falls in the Food Processing industry. After research i found the average P/E ratio for the Food Processing industry to be:

Current Avg P/E = 46.27
TTM Avg P/E = 64.36
FTM Avg P/E = 23.08


Pro forma numbers indicated in the form 10 estimate lamb weston had an EPS of 1.51 for the year ended 2016. If we used the current average industry P/E of 46.27 one could assume a reasonable price for LW could fair $69.87. I believe this to be to high. If we used the FTM of $23.08 we would get $34.85.. 


Review:
  • LW could be subject to selling from various current stockholders with just a glimpse of looking  due to its higher leverage compared to ConAgra and its different business. ConAgra employs a diversified portfolio of recognized brands while LW will be subject to a less diverse business that is subject to currency valuations and weather and crop season effects. LW could also come under selling pressure due to a significantly smaller market cap which could affect institutional holdings who have stock ownership requirements. If analyst are right a value of 29$ per share would create a 4.2 billion MC which would be a quarter of the overall MC originally held by ConAgra. 
  • Insiders, subject to more information regarding compensation package and incentives show interest that is aligned with stockholders managing the company as a individual entity. 
  • With an 8% net profit margin (industry avg 6.86%) and operating cash flow of 382m in year ended 2016 Lamb Weston does show promise in the future. With a solid customer base including massive chain restaurant McDonalds as the largest customer LW has room to grow and become an even more bigger part to the North America potato industry and global potato industry which is expected to have CAGR of 2% threw 2020. 


I will be looking for the company to be trading in the low 20s before i consider buying which i think is very possible if it begins trading around $30 dollars. 

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