How Low Can Diamond Foods Go?

Shares of Diamond Foods (Nasdaq: DMND  ) hit a 52-week low yesterday. Let's take a look at how the company got here and whether cloudy skies remain in its forecast.

How it got here
If you look up the meaning of "gaffe" in the dictionary, chances are there will be a picture of the Diamond Foods logo right next to it. The reason Diamond Foods is at a new low is very simply one PR disaster after another.

In February, an internal accounting audit determined that then-CEO Michael Mendes and CFO Steven Neil had improperly foregone payments to its walnut growers in order to artificially inflate Diamond's profits. The result of the audit landed Mendes and Neil on administrative leave and forced the company to admit that it would need to restate its 2010 and 2011 results. Although the company is still working on restating its results, it's quite possible EPS could be affected to the downside by as much as 50%.

To top this off, Diamond Foods had struck a deal with Procter & Gamble (NYSE: PG  ) to buy the Pringles brand for $2.3 billion, which would have made it the second-largest snack food company behind only Frito-Lay, the snack food division of PepsiCo. When news of the restatement hit, P&G was legally able to back out of its commitment to sell Pringles to Diamond and instead struck an even better deal with Kellogg (NYSE: K  ) . The deal was good news for the company, which has jumped about 7% since it was announced.

One final point: Three weeks ago Diamond Foods also suspended its dividend payment as part of an agreement with its lenders.

How it stacks up
Let's see how Diamond Foods stacks up next to its peers.

DMND Chart

DMND data by YCharts

It's actually amazing considering all of the issues Diamond shareholders have been through that this company is outperforming solid names like Kraft (NYSE: KFT  ) and P&G over the past five years.

Company

Price/Book

Price/Cash Flow

Forward P/E

Dividend Yield

Diamond Foods 1.0 7.0 6.3 0.9%*
Procter & Gamble 2.9 14.6 15.1 3.2%
Kellogg 10.8 12.2 14.1 3.2%
Kraft 1.9 14.7 13.4 3.1%

Source: Morningstar. *Dividend currently suspended.

This is one book you definitely don't want to judge by its cover. Considering that Diamond's earnings restatement could halve its profits, the company is trading more or less in line with its peers. The key knock against Diamond is that it's suspended its dividend whereas stable household snack food names like Kraft and Kellogg are doling out 3.1% and 3.2% yields, respectively.

What's next
Now for the real question: What's next for Diamond Foods? Personally, I'd say its very own made-for-TV comedy act, but the honest answer depends on whether or not Diamond can re-establish a working relationship with its growers and re-instill confidence with its investors.

Our very own CAPS community gives the company a two-star rating (out of five), with a surprising 84% of members expecting it to outperform. Although I have not made a CAPScall either way on the company, I find it very difficult to believe that Diamond is anywhere near a turnaround. The company has taken to shopping itself around to private-equity firms in order to shore up its balance sheet (albeit just minority stakes -- Diamond isn't looking to sell itself outright), and recently suspended its dividend. These are not the signs of a healthy company. Tack on its damaged business relationships with growers and a never-ending PR nightmare, and I'd say you have a very good case for the stock to continue to underperform.

Craving more input on Diamond Foods? Start by adding it to your free and personalized Watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and PepsiCo, as well as creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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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 April 13, 2012, at 3:51 PM, lbsssm wrote:

    Sean Williams misspells "foregone" in his comments on DMND. Such misspellings must always reduce the credence that one can give to an opinion.

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