Is It Time to Buy Into Diamond Foods?

Source: Diamond Foods

Packaged-food manufacturer Diamond Foods (NASDAQ: DMND  ) has been trying to right the ship ever since a 2011 accounting scandal took the wind out of it sails and led to a harrowing drop in its stock price, from which it has yet to fully recover. The company has anecdotally been hurt by rising international competition for U.S. nut farmers' output that has raised raw prices and restricted available supplies, leading to sales declines in its nut segment.

On the bright side, though, Diamond Foods has found some sales growth by focusing more on the snacks business, a strategy that has also worked well for competitor Boulder Brands (NASDAQ: BDBD  ) . So, is the company a good bet at current prices?

What's the value?
Diamond Foods is one of the country's largest sellers of packaged nut products, a natural byproduct of its history as a co-op of California walnut growers. However, given the superior selling margin of the snack foods business, the company has been aggressively moving into that space, mostly through its acquisitions of the Pop Secret and Kettle Brand franchises in 2008 and 2010, respectively. That strategic mind-set allowed Diamond Foods to increase its revenue base by more than 50% over the past four fiscal years, despite a challenging selling environment in its nuts segment.

Unfortunately, Diamond Foods' profit growth trajectory has not matched its top-line trajectory, evidenced by an adjusted operating loss in its latest fiscal year. Despite a year-over-year increase in its gross margin, thanks to higher average product prices, the company was hurt by higher corporate administrative costs as well as a need to spend on product development and marketing initiatives in order to stay afloat in the highly competitive snacks business.

However, Diamond Foods looks like it may have turned a corner lately, reporting higher adjusted operating profitability in FY 2014. While the company's nut segment continued to back pedal during the period, its snacks segment enjoyed solid growth that led to a double-digit jump in segment operating income. As a result, management is expecting Diamond Foods to generate an adjusted operating profit gain for the current fiscal year.

The sector's getting crowded
Of course, whether or not Diamond Foods will be able to deliver on management's projections is up for debate, especially given the rising level of competition in the so-called "better-for-you" area of the snacks business in which the company competes. Boulder Brands, for one, has built a major presence in the space, offering a wide variety of snack foods products, mostly under its Udi's and Glutino brand names. The rising popularity of the company's products has allowed it to capture more distribution points in the grocery industry, a favorable trend that has led to solid sales growth for the company over the past few years. 

More importantly, Boulder Brands' larger size has created scale efficiencies in its operations, positively impacting its profitability and providing funds for further product development.

Likewise, the snacks business has been a major focal point for Hain Celestial (NASDAQ: HAIN  ) , which enjoys a strong position in the space with its Garden of Eatin' and Terra brands.  Similar to Boulder Brands, Hain Celestial Group has benefited from a consistently larger distribution footprint in the grocery industry, which has helped to spur a more than 60% increase in its top-line over the past four fiscal years. Not surprisingly, the higher sales tallies have led to rising profits for the company during the period, providing a solid financial foundation for its acquisition-heavy growth strategy.

The bottom line
Mr. Market seems to like the business developments at Diamond Foods, bidding the company's stock price up by more than 30% over the past 12 months, despite some recent price weakness caused by a profit shortfall in Diamond Foods' latest quarterly report. That being said, Diamond Foods still seems to be a work in process, given that its nuts segment, accounting for almost half of its sales, is still stuck in reverse. As such, investors should keep their eyes on the company but should wait for some stock price weakness prior to betting on the story.

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