Why I'm (Still) Steering Clear of Diamond Foods

Investors are expecting the best from the beleaguered snack maker.

Jun 9, 2014 at 11:44AM

Investors are still having a hard time finding the diamond in the rough with Diamond Foods (NASDAQ:DMND). In its recent third quarter, the company missed analyst expectations on both revenue and earnings, the latter by a substantial amount, clocking in at an adjusted $0.11 versus expectations of $0.17. Still, the company's turnaround is finally starting to take hold, so it's worth holding this diamond up to the light and seeing how much it may or may not sparkle.

Fried chips and popcorn, somehow healthier than nuts
Despite missing estimates, there is some good news. Diamond posted positive sales growth this quarter for the first time since the beginning of 2012. Granted, it was an unimpressive 3%, but it's consistent with the gradual improvement over the last several quarters.

DMND Revenue (Quarterly YoY Growth) Chart

DMND Revenue (Quarterly YoY Growth) data by YCharts.

Much of the improvement can be explained by a shift away from the company's Nuts segment, which in previous years contributed the greatest part of the company's sales. Shifting away from Nuts makes a lot of sense. Even before the steep rise in nut costs, the Snacks segment contributed a far greater share of profits. Now, it carries a gross margin close to 10 times higher than the Nuts segment.

There are two main reasons for the increasing nut costs. First, during its accounting scandal a couple of years ago, certain growers announced plans to stop selling to Diamond, claiming the company was offering unreasonably low prices. It may be the case that Diamond has had to offer higher prices to growers to stay competitive.

The bigger reason, however, is that most of the company's nuts are grown in California -- Diamond Foods, after all, was once known as Diamond of California, and began as a cooperative of a group of California walnut growers. Unfortunately, California has been the victim of a vicious drought for quite a while now, driving up the cost of most of the state's agricultural products.

Diamond obviously can't control the weather, but it does have substantial market share in many of its snack products, allowing it to charge a much higher premium for things like Kettle Chips than it could for nuts. Hopefully this will be a permanent shift, despite any nostalgia for the company's origins, because focusing on high-margin snack products will not only improve overall margin in the future, it will also be more consistent.

A tough walnut to crack
While I'm cautiously optimistic about Diamond, I still can't reasonably recommend it. Because of a very large debt refinancing this quarter that even CEO Brian Driscoll described as "rather complicated", the company's actual earnings are vastly different from the adjusted earnings, which also differ greatly from adjusted EBITDA. Aside from the "rather complicated" refinancing, Diamond also has a number of other non-standard expenses, including the continuing cost of the audit committee needed for the accounting scandal, the cost of a securities class action lawsuit settlement, and the cost of a settlement with the SEC. All in all, it's hard to get a clear picture of how the company is actually doing, and millions of dollars' worth of miscellaneous legal expenses can't just be "adjusted" forever.

Despite the somewhat weak turnaround and the difficulty involved in getting a real read on the business, the stock is up 83% over the last year. Even after Friday's 11% drop, investors still seem to be setting high expectations, and that may prove dangerous.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Jacob Roche 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers