After an Earnings-Related Bump, Does Diamond Foods Have More Upside?

Shareholders in niche snack-foods marketer Diamond Foods (NASDAQ: DMND  ) have been on a roller-coaster ride over the past few years. The company has alternatively had to deal with government investigations into its accounting practices, class action lawsuits, and unhappy suppliers. However, Diamond Foods has been slowly rebuilding its story, including settling up with disgruntled shareholders last fall. The latest bit of good news came in the form of a slightly better-than-expected profit performance in its latest quarterly update, which led to a pop in its share price. 

So, is Diamond Foods a good bet at current prices?

What's the value?
Prior to its well-publicized fall from grace, Diamond was one of the snack-foods sector's fast growth stories, largely engineered through debt-fueled acquisitions of popular brands; it acquired Pop Secret and Kettle Brands in 2008 and 2010, respectively.  Those acquisitions were primarily responsible for helping the company post a more than 80% jump in sales from 2008 to 2011. 

Unfortunately, Diamond's debt proved to be a sharp two-edged sword. The company was forced to restate financial results due to inaccurate accounting of payments to suppliers. This led to a subsequent liquidity crisis that wasn't subdued until investment firm Oak Tree Capital came through with a capital infusion in 2012.

The capital infusion has given Diamond time to refocus on the higher-margin snack-foods segment and away from the legacy nuts business. The nuts segment continues to struggle from rising prices and shrinking margins, a byproduct of more international competition for U.S. farmers' nut crop supply. 

The benefits of Diamond's renewed focus have surfaced in its financial results, highlighted by improved adjusted operating profitability in FY 2014. More importantly, the company has generated further improvement in its operating cash flow, providing more capital to invest in product development and marketing spending.

Looking for more diversification
Diamond has exhibited some solid momentum in its snack-foods business in the current period, with segment sales up a double-digit percentage. But the company continues to be weighed down by weak performance in its nuts business, which has led to an overall top-line decline for the company. 

Diamond also seems to anecdotally rely too heavily on a limited product portfolio for its snacks segment, an area that seems overly focused on the Kettle Brand Potato Chip product line. As such, investors would likely find better returns with more diversified players in the snack-foods business, like Boulder Brands (NASDAQ: BDBD  ) .

The niche food marketer has used a similar strategy to Diamond Foods. It has built a solid footprint in the premium snack-foods segment with a string of acquisitions including Glutino and Udi's in 2011 and 2012, respectively. 

Boulder Brands has undoubtedly benefited from greater public interest in gluten-free offerings, the focus for both Glutino and Udi's. The company has also improved its overall growth trajectory by expanding beyond traditional snack foods into related product areas, like baked goods and breakfast items. The net result for Boulder Brands has been strong top-line performance, including a 24.8% increase in its latest fiscal year.

An even better bet for investors might be Hain Celestial (NASDAQ: HAIN  ) , a major player in the premium snack-foods business through its Garden of Eatin' and Terra brands. Like Boulder Brands, Hain Celestial has been buying up niche competitors in order to fill out its product portfolio and reduce its reliance on any one product category, highlighted by recent forays in baby food and rice products. 

The company's diversification mind-set has led to three straight years of double-digit top-line growth, a trend that has continued in the first six months of FY 2014. Just as importantly, Hain Celestial's broad product line has led to manufacturing efficiencies and improved operating cash flow, funding product development efforts that should lead to higher shareholder value down the road.

The bottom line
Diamond Foods has waded through the turbulent waters and has come out the other side with an improved business story. This has led investors to bid the company's shares up sharply over the past 12 months. However, given that Diamond Foods' nut business, accounting for nearly half of its sales, is still mired in decline, new investors should let this snack maker cool off a bit prior to taking a bite.

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