Lamb Weston's Undervalued Position in a Rational Frozen Fries Industry

The frozen fries industry is entering a phase of disciplined growth, marked by improving pricing power and margin expansion, yet constrained by uneven capacity utilization and evolving consumer preferences. Amid this backdrop, Lamb Weston Holdings Inc. (LW) stands out as a compelling case study in strategic resilience. While the company faces near-term headwinds in North America, its international expansion, operational efficiency initiatives, and alignment with industry-wide capacity cycles position it as an undervalued player in a sector poised for long-term gains.

Industry Dynamics: Pricing Power and Capacity Constraints

The global frozen fries market, valued at $25.7 billion in 2025, is projected to grow at a 4.5% compound annual growth rate (CAGR) through 2035, reaching $39.9 billion. This expansion is driven by the quick-service restaurant (QSR) sector's reliance on convenience foods and technological advancements in processing. However, capacity utilization remains a critical variable. Emerging markets are fueling volume growth, but achieving long-term targets hinges on balancing supply and demand.

Pricing power has strengthened in 2025 Q4, with EU import prices for frozen potatoes rising 3.7% year-over-year to $1,503 per ton. This trend is underpinned by raw material cost inflation, energy expenses, and the premiumization of value-added products like air-fried or seasoned variants. Meanwhile, industry-wide profit margins are expanding as companies pass through cost increases to consumers, supported by inelastic demand for convenience foods.

Lamb Weston's Strategic Positioning

Lamb Weston, the second-largest player in the food processing industry with a 20.31% market share, has navigated these dynamics with a mix of cost discipline and geographic diversification. Its Q4 2025 results reflect both challenges and opportunities: net sales rose 4% year-over-year to $1.68 billion, driven by an 8% volume increase, though pricing pressures and soft QSR traffic offset gains. Adjusted EBITDA held steady at $284.9 million, with the International segment delivering a 55% year-over-year improvement due to volume growth and efficiency gains.

The company's "Focus to Win" initiative, targeting $250 million in savings by 2028, underscores its commitment to margin preservation. By closing underperforming facilities and curtailing production lines in North America, Lamb Weston is aligning capacity with demand while reducing capital intensity. These measures are critical in a sector where overcapacity risks eroding pricing power.

Capacity Cycles and Long-Term Growth

Lamb Weston's capital expenditures in 2025 highlight its strategic focus on capacity optimization. The company has completed expansion projects in China, the U.S., and the Netherlands and is set to begin production at a new facility in Argentina in August 2025. These investments are designed to capitalize on emerging markets, where frozen potato demand is growing at a 7.5% CAGR. By expanding in regions with untapped potential, Lamb Weston is positioning itself to benefit from higher-margin international sales while mitigating North American headwinds.

The company's fiscal 2026 outlook-projecting net sales of $6.35–$6.55 billion and adjusted EBITDA of $1.0–$1.2 billion-reflects confidence in its ability to navigate near-term challenges. With capital expenditures of $500 million, including $100 million for wastewater treatment, Lamb Weston is also addressing sustainability concerns that could influence long-term regulatory and consumer dynamics.

Valuation and Investor Implications

Despite these strengths, Lamb Weston trades at a price-to-earnings ratio of 27.3, higher than its industry peers. Analysts argue this premium is unjustified given the company's mixed financial performance in 2025, including a decline in income from operations. However, its undervalued intrinsic worth-estimated at $66 per share-suggests a disconnect between current valuations and its long-term potential.

The key to unlocking this value lies in the company's ability to execute its cost-reduction plans and leverage international growth. With North America's margin pressures expected to stabilize and emerging markets offering robust expansion opportunities, Lamb Weston's disciplined approach to capacity management and pricing could drive margin expansion in the coming years.

Conclusion

The frozen fries industry is entering a rational phase, where companies that balance capacity discipline with pricing power will thrive. Lamb Weston's strategic investments, operational efficiency initiatives, and geographic diversification position it to outperform in this environment. While near-term challenges persist, particularly in North America, the company's focus on long-term profitability and alignment with global growth trends make it an undervalued asset in a sector poised for sustained expansion.