Don't Go Nuts Over Diamond's Recent Fall

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It hasn't been a great couple of months for Diamond Foods (Nasdaq: DMND  ) . As recently as Sept. 21, its stock achieved a 52-week high at over $96 a share. However, upon an announcement that management was investigating some accounting procedures, the stock price fell nearly 24% last week. The investigation will probably result in an adjustment to this year's earnings, but hopefully the company can figure out what is wrong with its accounting so it doesn't affect future quarters. But there are other things that could still make Diamond Foods a buying opportunity.

We're No. 2!
These accounting irregularities and the resulting damage to the share price have delayed the completion of the acquisition of Pringles from Procter & Gamble (NYSE: PG  ) . The Pringles sale would signal Procter & Gamble's exit from the food business and allow the company to focus on the growth of its consumer products business. P&G's loss would be Diamond's gain; the addition of the Pringles brand to Diamond's stable of snacks would triple Diamond's revenue to about $2.4 billion a year. Upon completion, Diamond would become one of the world's largest snack companies, rubbing shoulders with Frito-Lay owner PepsiCo (NYSE: PEP  ) .

Or No. 3
Another food company plans to directly compete within the snack food category. Kraft (NYSE: KFT  ) plans to spin off its global snacks group, providing flexibility for it to acquire additional snack brands, such as those held by ConAgra Foods (NYSE: CAG  ) . Last year, Kraft's snack group accounted for more than $6 billion of revenue in the U.S. alone, a number that ranks it second to Frito-Lay with regard to snack sales if they were separate from the Kraft grocery business. One disadvantage with Kraft is its lack of chips, giving Diamond a leg up with the acquisition of Pringles.

What do you think?
Could the accounting investigation uncover further issues? I don't think so, but only time will tell. As long as it is able to find and correct the problem, the pending acquisition of Pringles could make this company sparkle in your portfolio and provide you with some great snack alternatives for your kitchen. Keep an eye on Diamond Foods by adding it to your free My Watchlist by clicking here.

Fool contributor Robert Eberhard enjoys popcorn and other salty snacks, but owns no shares of the companies mentioned in this article. Follow him on Twitter, where he goes by @GuruEbby. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and PepsiCo. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2011, at 2:04 PM, max0205 wrote:

    This post is irresponsible. Making broad statements such as “Could the accounting investigation uncover further issues? I don't think so, but only time will tell” without a discussion of the specific facts is a dangerous statement. People rely on your site for investment ideas and being glib about accounting issues is not fair to your readers. The accounting issues are extraordinarily serious for a company as levered as Diamond Foods. If Diamond’s momentum payments to walnut growers in August-September have to be expensed in FY 2011, then Diamond would be in significant breach of both of its debt covenants. If Diamond breaches its debt covenants then the failure of the Pringle's acquisition is the least of Diamonds problems.

  • Report this Comment On November 06, 2011, at 12:13 PM, gatzbp wrote:

    I agree with the previous commenter that glossing over the accounting issues is fairly irresponsible. I'm not familiar with their debt covenants but that would be a huge consequence. In addition given the clear intent (I believe there is written evidence this payment was for trailing year crops) it could be fraudulent. It could also kill the pringles deal given DMND is buying pringles with stock: the company's stock price is now 50% lower plus the deal was made with representations by DMND which may now be broken.

    I agree it's generally good to buy when others are fearful however with accounting issues and levered companies, this rule goes out the window for me.

    If you're going to play this company on the long side I would suggest OTM calls so you limit your capital losses if this stock continues its freefall, which it could do if there is a covenant breach or other material violation here. Cheap way to maintain some upside optionality.

  • Report this Comment On November 06, 2011, at 11:25 PM, XMFTheGuruEbby wrote:

    max0205 and gatzbp,

    I did not mean to sound so flippant about the accounting irregularities with the payments to its walnut growers. As an accountant by education, I don't take accounting irregularities lightly, but I will reserve final judgement as to its legality until the investigation is complete.

    Per the article, I view Diamond as an opportunity to buy due to the recent cut in price, but I am not rushing out to buy the stock. If the Pringles acquisition does occur, the company will be a player in the snack food sector. Time will tell if this occurs.

    Thank you for reading and your comments!


  • Report this Comment On November 07, 2011, at 1:59 PM, gatzbp wrote:

    Thanks for the reply. I certainly buy the argument that if the Pringles acquisition occurs, the company has an interesting shot at making a lot of money if they can turn around the brand. They will also have a good amount of leverage, which would juice any returns.

    As an accountant (I am not), do you have any thoughts/knowledge of any impact there could be on any debt covenants should DMND have to restate earnings?

    Also seeing as DMND's stock has fallen so precipitously since the original agreement, wouldn't P&G be looking at any violations to walk away from the merger agreement, or is it conventional for P&G to hedge out DMND's stock price in some way?

    Thanks very much

  • Report this Comment On November 07, 2011, at 2:01 PM, gatzbp wrote:

    My disclosure: I was short until 11/7 and now do not carry any position.

  • Report this Comment On November 07, 2011, at 3:29 PM, XMFTheGuruEbby wrote:

    To be honest, I'd have to dig a bit more into the debt covenants brought up by the other commenter, but since the Pringles deal was based largely on the price of DMND's stock. If it cannot recover, they would have to take out more debt to make the purchase. I could see a renegotiation, or PG taking the brand elsewhere to get out of the snack business. DMND is getting hammered again today, so it would take a minor miracle for it to get anywhere near where it needs to be for the Pringles deal to happen as written right now.

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