Diamond Foods Has More Upside in Store

New product introductions and solid growth projections make Diamond Foods an enticing investment.

Apr 28, 2014 at 4:26PM

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.

Will this stock be your next ten-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with amazing potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303%! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Amal Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers