Lancaster Colony Stock: Consolidation Likely in the Near-Term (NASDAQ:LANC)

Introduction

Lancaster Colony Corporation (Nasdaq:Langkawi) Last September, ‘Owned’ Stagnant technical indicators and declining future EPS have led to a decline in the stock’s valuation. revisionConsensus Revision Shortly after our comments on Lancaster Colony, the company is expected to report earnings per share of $6.28 for the current fiscal year ending June 2024 (up from $6.10 as of September 2023), and this trend has started to improve. This trend has helped drive the stock price up a little over 12% over the past nine months.

From a technical perspective, we believe a “Hold” rating is initially the right decision for the specialty food company. As the technical chart below shows, the stock has seen a strong rise in early 2024, but in March of this year it was unable to gain the momentum it needed to surpass its all-time highs from May of last year. Despite being at multi-month lows, the fact that the stock continues to trade above its 200-day moving average ($178.66) is encouraging, especially considering the bullish divergence in the MACD indicator. So, let’s take a look at the trends and key indicators that make up Lancaster Colony’s profitability and valuation to see if they are in line with what we are currently seeing on the technical charts (further consolidation).

Exclusion dividend The increased payout has helped LANC’s share price rise by more than 30% over the past five years, although, as we explain below, some of the company’s key profitability metrics continue to lag behind their corresponding five-year averages.

Gross profit remains below historical average

Lancaster Colony’s Latest Third Quarter Profit In the report, the company reported gross profits of $107.1 million on sales of $471.4 million. Sales increased due to strong adoption of the newly launched Texas Roadhouse & Subway at retail and above-average demand in the food department. These figures, reported on the income statement, represent the company’s highest third quarter in history, resulting in third quarter gross margins of 22.72%.

Strong performance from PNOC, continued cost-cutting improvements, and increased revenues (despite the discontinuation of Angelic Bakehouse & Flatout) led to increased gross profit for the quarter ($104.5 million). It is important to note that gross margins for this third quarter increased significantly compared to the same period last year (20.26%), but were below the trailing 12-month average (22.97%) and the five-year average (24.13%).

Remember, this decline in average profitability comes against the backdrop of a stock price increase of over 30% over the past five years. This is important because trends in a company’s gross margins tend to set the baseline for what its ultimate profitability will be going forward. At this point, the impact of recent long-term inflation on Lancaster’s retail and food business can be seen in the company’s trailing five-year net margin of 7.1%, which is below its trailing five-year average of 8.48%.

The focus on the trailing twelve month numbers is due to the aforementioned charges related to the exit of product lines (thus somewhat skewing the third quarter GAAP earnings numbers) and associated inventory disposals. In the recent third quarter earnings call, management highlighted the fact that lower forward-looking derived costs for “Project Ascent” and lower forward-looking capital expenditures (with work now completed on Horse Cave) will free up more cash going forward. While this may be true, it remains to be seen whether this cash will be put to fruitful use in terms of returning key gross margin metrics higher than historical norms over time.

Valuation of LANC using the dividend discount model

Given that Lancaster Colony has grown its dividends over the past 60-plus years, we can use the common dividend discount model below to calculate its approximate dividend: evaluation in stock.

EDPS stands for expected dividend per share, CCE stands for cost of equity capital, and DGR stands for dividend growth rate. $0.90 Last month’s quarterly dividend per share would put the upcoming annual dividend at $3.60 per share.

To calculate the sustainable dividend growth rate, we multiply Lancaster Colony’s GAAP retention rate by its past year’s return on equity. This makes sense because the retention rate tells us how much net income is essentially “retained” for business growth. In contrast, ROE tells us how effectively a company is using its capital. Multiplying the company’s GAAP retention rate (26.35%) by its past year’s ROE (14.85%) gives us a sustainable DGR of 3.99%. Interestingly, this calculation also lags behind the five-year average annual dividend growth rate (6.8%). So, let’s get to work on our valuation.

A sustained dividend growth rate of 3.99% would mean the company’s EDPS (forecast dividend per share) would be $3.74 per share.

Cost of Equity

Cost of Equity refers to the rate of return that an investor can get by investing in a stock. It is a very useful metric as it provides a baseline scenario or cut-off point for investor interest. To calculate Cost of Equity, use the following formula:

Cost of Equity = Risk-free Interest Rate + (Beta) x (Equity Risk Premium)

Here, we use the 10-year US Treasury bond (4.43%) as the risk-free rate, the beta (0.38) is a measure of Lancaster Colony’s volatility, and the “equity risk premium” indicates the absolute minimum market return an investor can expect on an investment in Lancaster Colony.Damodaran) currently stands at 4.6% in the U.S. What’s immediately noticeable here is that the company’s beta is very low, making a long-term investment in LANC look less risky in the eyes of investors.

Substituting all the values ​​into the first formula, we get the following result:

LANC Valuation = $3.74 / (0.0443 + (0.38)(0.046) ) – 0.0399

= $170.93 per share

Conclusion

So, in summary, we reiterate our “Hold” rating on Lancaster Colony as technical indicators remain range bound, profitability trends are below average, and our valuation estimate is approximately 9% below Lancaster Colony’s current share price. We’ll see what the fourth quarter numbers bring, and we look forward to continued coverage.