Looking for an Investment With a Margin of Safety? Check Out Lamb Weston (LW)

Lamb Weston meets some but not all of Benjamin Graham's requirements for a defensive stock. The Packaged Foods company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.

Lamb Weston Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 6 year average earnings per share (2.39) * 6 year average book value per share (9.689) = $8.76

After an impressive 26.0% performance over the 12 months, Lamb Weston is now trading well over its price because its Graham number is 1015.4% above today's share price of $97.71. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Impressive Revenues, Consistent Profitability, and a Growing Dividend Imply Value

Lamb Weston’s average sales revenue over the last 6 years has been $4.15 Billion, so by Graham’s standards the stock has sufficient revenues to make it worthy of investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today.

Ben Graham believed that a margin of safety could be obtained by investing only in companies with consistently positive retained earnings. Retained earnings represent the cumulative net earnings or (deficit) left to equity holders after dividends have been paid out. Lamb Weston had positive retained earnings from 2017 to 2023 with an average of $1.02 Billion over this period.

Ben Graham would also require a cumulative growth of Earnings Per Share of at least 30% over the last ten years.There are only 9 years of EPS data available on Lamb Weston, which is short of the required 10, but it's still worthwhile to consider its EPS trend over the available period. First, we will average out its EPS for 2015 and 2016 which were $0.50 and $0.59 respectively. This gives us an average of $0.54 for the period of 2015 to 2016. Next, we compare this value with the average EPS reported in 2022 and 2023, which were $1.38 and $6.95, for an average of $4.16. Now we see that Lamb Weston's EPS growth was 670.37% during this period, which satisfies Ben Graham's requirement for growth.

Lamb Weston’s Balance Sheet Meets Graham’s Criteria

It was also essential to Graham that the company’s current assets outweigh its current liabilities, and that its long term debt be inferior to the sum of its net current assets (current assets minus total liabilities). This is the aspect of the analysis that most companies fail, yet Lamb Weston passes comfortably, with an average current ratio of 2.4, and average debt to net current asset ratio of -1.3.


Lamb Weston offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.

2017-07-25 2018-07-26 2019-07-25 2020-07-28 2021-07-27 2022-07-27
Revenue (MM) $3,168 $3,424 $3,756 $3,792 $3,671 $4,099
Gross Margins 25.0% 26.0% 27.0% 24.0% 23.0% 20.0%
Operating Margins 16% 17% 18% 15% 13% 11%
Net Margins 10.0% 12.0% 13.0% 10.0% 9.0% 5.0%
Net Income (MM) $327 $417 $479 $366 $318 $201
Net Interest Expense (MM) -$61 -$109 -$107 -$108 -$118 -$161
Depreciation & Amort. (MM) -$109 -$143 -$162 -$182 -$188 -$192
Earnings Per Share $2.23 $2.84 $3.25 $2.49 $2.16 $1.38
EPS Growth n/a 27.35% 14.44% -23.38% -13.25% -36.11%
Diluted Shares (MM) 147 147 147 147 147 146
Free Cash Flow (MM) $734 $788 $1,015 $742 $700 $708
Capital Expenditures (MM) -$287 -$307 -$334 -$168 -$147 -$290
Net Current Assets (MM) -$2,224 -$2,101 -$2,091 -$2,120 -$1,947 -$2,120
Long Term Debt (MM) $2,365 $2,337 $2,280 $2,993 $2,705 $2,696
Net Debt / EBITDA 3.77 3.22 2.79 2.94 2.95 3.46
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.