Diamond Foods Continues Its Fantastic Turnaround

Diamond Foods (NASDAQ: DMND  ) surprised investors once again on March 11 by beating the second-quarter earnings estimates, which sent the stock up around 10% the next day.

This company is working through a long term turnaround strategy that is still in its early stages. Despite headwinds, Diamond Foods produced good results.

Some of the talking points for Diamond Foods' second-quarter earnings release include:

  • Adjusted non-GAAP EPS came in at $0.09 to beat estimates calling for $0.08
  • Nuts segment continued to underperform due to high tree nut costs
  • Gross margin expanded by 2.5% from prior year's second quarter
  • Adjusted EBITDA rose 24.4% from prior year's second quarter

What this means for Diamond
Non-GAAP adjusted EPS doesn't paint a rosy picture for Diamond; the company actually recorded a loss of $15.1 million or $0.68 per share in the second quarter. The $0.09 in net earnings per share stems from the company's adjusted earnings of $2.6 million for the quarter, which strips out some non-recurring charges stemming from lawsuit settlements and debt warrant liabilities.

Net sales for the quarter essentially stayed flat from the year-ago period at $220 million, but the gross margin increased by an impressive 11%. 

Diamond's snack segment, which includes the Kettle chips and Pop Secret popcorn brands, did very well with sales of $116 million, which represents 11% from the year-ago period. Along with the sales growth in the snacks segment, gross margin expanded as gross profit also increased 22% from the year-ago period.

Diamond has been warning about higher tree nut costs and the implications that this will have for its nuts segment. This quarter, sales from Diamond's nuts segment fell 10% to $105 million.

The many odd charges from debt warrants and lawsuit settlement earnings can be difficult to interpret. In this situation EBITDA, another non-GAAP measure, can help us evaluate a company's operations and Diamond has done well by this measure. Diamond's adjusted EBITDA for the second quarter rose from $22.9 million a year ago to $28.5 million this year for a 24.4% rise.

My take
In the second-quarter earnings release, Diamond Foods' management expressed concerns once again about tree nut prices going into the second half of the year. However they also said that they expect to overcome these problems, and year-over-year EBITDA should increase.

Long term debt is still over four times the value of stockholders' equity and the company's margins are still lower than those of most other packaged food producers. A debt restructuring last month will help with both of these issues moving forward. If Diamond Foods can post a few more strong quarters, this should give investors plenty to cheer about in the next several years to come.

Checking in on the competition
Two of Diamond Foods' much-larger competitors have earnings reports scheduled for this week. General Mills (NYSE: GIS  ) and ConAgra (NYSE: CAG  )  have reports scheduled for March 19 and 20, respectively.

Analysts look for General Mills to grow revenue modestly by around 1% from the year-ago period, and they expect earnings per share to grow to $0.68 from $0.64 in the year-ago period. 

On the other hand analysts expect ConAgra to grow revenue by around 13% this quarter from the year-ago period, which reflects increases from the company's acquisition of Ralcorp in late 2013. Analysts expect earnings per share to come in at $0.60, up from $0.55 in the year-ago period. 

Investors do not expect high growth in this corner of the investment universe. If the company can slow the bleeding of its nuts segment and continue to improve its efficiency, Diamond Foods could outgrow competitors on a relative basis for a long time to come.

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