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Diamond Foods Has More Upside in Store

Shares of processed & packaged goods company Diamond Foods (NASDAQ: DMND  ) have risen sharply this year. The company has outperformed industry peers such as ConAgra Foods (NYSE: CAG  ) and Kellogg (NYSE: K  ) handsomely with a share price gain of more than 20% in 2014. Diamond's recently released second-quarter results have played a key role in its rise this year.

The company seems to have put its troubled past -- which included a failed acquisition and an accounting scandal -- behind it. Now, its moves suggest that things are about to get better, and this makes Diamond a good long-term investment.

Strong progress
Diamond is making good progress in its business, achieving a gross margin of 25.4% in the second quarter which increased from 22.9% in the year-ago period. The company is investing in brand strategies, innovation, and distribution going forward.

The company's business revolves around two segments -- snacks and nuts. Diamond has done exceedingly well in the snacks segment, driven by key initiatives such as manufacturing and supply chain efficiencies, cost savings, and volume-related operating leverage.

Diamond is seeing strong momentum across its snacks brands such as Kettle and Pop Secret. Kettle's retail sales in the U.S. increased 12% in the second quarter, while the core fried-chip product line was up 17.6%. 

The road ahead
Going forward, the company plans to launch four varieties of Kettle ready-to-eat popcorn -- White Cheddar, Sea Salt, Maple Bacon, and Salt & Fresh Ground Pepper. Diamond also plans to launch five varieties of Kettle-branded real-sliced potato chips in the second half of the fiscal year. These launches will definitely enable to Diamond bolster its product portfolio.

Diamond's Kettle brand in the U.K. has also seen steady and sustainable growth of 6% in retail sales. The company had introduced Kettle-branded chips with a tinge of lime and rosemary in the previous quarter within the U.K. The product has received a positive response from customers, and the company plans to strengthen its product line-up in the U.K. further.

Diamond plans to launch Kettle baked potato and baked sweet potato varieties in the second half of the year. These launches will help Diamond increase its household penetration and improve its net price realization as a result of market share gains and strong distribution. 

However, Diamond saw weakness in the nut segment due to higher costs and lower nut supply. The company is tackling these headwinds with a proactive pricing initiative and it is improving the supply chain by focusing on cost reductions. These efforts are already underway, which is why Diamond has noticed a significant improvement in the supply of nuts for its Diamond of California brand. The company has also improved the performance of the Emerald brand by launching a 100-calorie product line that now represents 20% of the brand's revenue.

A better prospect
With these moves, Diamond looks to have put itself in a strong position for further growth. In fact, the company's estimated earnings compound annual growth rate for the next five years is an astounding 31%. This is way better than the expectations for Kellogg, which call for growth of just under 6%, and ConAgra with its expected growth rate of 7%. 

In addition, both Kellogg and ConAgra are seeing some weaknesses in their businesses. Kellogg's cereal business has been under pressure since consumers are looking at healthier food options. This year, Kellogg's pipeline includes products such as Special K Chocolate Almond, the Krave cereal, Bear Naked granola, and new Kashi cereals. In addition, Kellogg is focusing on genetically modified organism, or GMO, free products with its Organic Promise brand. 

ConAgra, on the other hand, is witnessing weakness in its private-label segment. The company has cut its fiscal 2014 forecast twice this year, and now expects earnings of $2.22-$2.25 per share while analysts had expected $2.34 per share. ConAgra's volumes were down 3% in the previous quarter, so it doesn't make much sense to buy a company with a falling top line and expectations of slow earnings growth.

Bottom line
Diamond Foods has done very well this year, and it looks like the trend will continue. The company's focus on introducing new products and improving its supply chain should help it maintain its momentum going forward. Diamond's expected earnings growth rate is also quite impressive, so it could be a good buy for the long run.

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