The tater tot trade: Domino’s new menu item should boost this potato play, Bank of America says
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A new addition to the menu at Domino’s Pizza’s could translate into big gains for shares of potato producer Lamb Weston , according to Bank of America. One day after Domino’s announced the national roll out out of “Loaded Tots,” Bank of America analyst Peter Galbo reiterated a buy rating on Lamb Weston shares, and repeated a 12-month price target of $115 on the Idaho-based company’s stock, implying 16% upside from Tuesday’s closing price. Lamb Weston, whose shares have already risen about 11% in 2023, stands to benefit from the Domino’s move, Bank of America said. It’s the largest manufacturer of frozen potato products in North America with a 43% market share. Although the bank does not view the tater tots as incremental to Lamb Weston’s financial outlook for the current fiscal year, Galbo wrote that the potato processor recently added 50 million pounds to its capacity for chopped and formed potato products, such as hash browns and tater tots, in order to support increased demand. Potatoes are on 83% of menus in fast-casual restaurants across the U.S., according to a 2021 PotatoesUSA survey . Bank of America expects that to increase with Domino’s tater tots launch, adding that tight potato supply and limited capacity growth supports a “longer-term bull case” for Lamb Weston earnings. “We expect strong demand for Loaded Tots as consumers look for shareables they can add to their existing orders,” Galbo wrote in a research report Tuesday. “We view the Tots launch as the start of a renewed product innovation cycle that will drive higher ticket, customer trial and frequency.” The tater tots are already available in some stores and will be rolled out nationally later this month, with some customers able to get their hands on them in time for the Super Bowl on Sunday. The tots will arrive frozen and be oven-baked in the store, rather than fried, before being topped. Domino’s is offering the tots in three varieties: Philly Cheese Steak, Cheddar Bacon and Melty 3-Cheese. The launch comes after Domino’s had paused its normal promotional activity and delayed introducing new products during the pandemic, when it instead focused on maximizing existing operations. Galbo estimates the tater tots could lift Domino’s retail sales by about 2% in their first year. Bank of America also reiterated Domino’s as a buy with a a $448 price target, suggesting upside of 25% from its closing price on Tuesday. Shares of the chain are up about 2% this year. Note to customers. The Loaded Tots don’t necessarily come promotionally cheap: they’re priced at $6.99.