What happened
Shares of Lamb Weston Holdings (LW 0.42%) were up 8.6% as of 11:27 a.m. ET on Thursday after the company announced strong results for the fiscal first quarter ending Aug. 27.
The frozen potato supplier said net sales grew 48% year over year partly boosted by acquisitions. Moreover, adjusted earnings per share more than doubled from $0.78 a year ago to $1.63. The strong performance caused management to raise its full-year earnings forecast.
So what
The company's sales got a boost from higher prices implemented last year. Excluding the favorable impact of acquisitions, organic (adjusted) sales volumes were still in line with management's expectations.
The positive outcome from the price increases is a great indicator that Lamb Weston has a reputation for delivering quality food products that are not easily replaceable. Management didn't report any negative consequences from the pricing actions taken last year. McDonald's is a top customer, making up 11% of total sales in fiscal 2021.
Solid pricing power has helped Lamb Weston offset higher costs due to inflation. Sales volume was down 8% in the quarter but that mostly reflected management's decision to exit low-margin business lines.
Now what
The stock only returned 35% over the last five years, but all those gains have come in just the last two years. With the stock trading at a slightly below-average forward price-to-earnings ratio of 18.7, it could be a relatively undervalued growth stock right now. Easing inflationary pressures should become growth tailwinds over the next few years.
In the near term, management sees the potato crop in line with historical averages, and the company is also starting up a new facility in China this month.
