Is Diamond Foods a Diamond in the Rough?

Photo credit: Sheabq.org

Many investors are eagerly searching for a diamond in the rough stock -- a company that stands out among its peers in a tightly competitive market. Stockton, Calif.-based Diamond Foods  (NASDAQ: DMND  )  has been attempting to recover from a scathing accounting scandal that occurred in 2012 and prove itself to be a diamond in the rough. Should investors consider buying into the company's turnaround efforts, or is Diamond Foods a stock to avoid?

The case for Diamond Foods
Diamond Foods has a solid lineup of food brands, including Pop Secret popcorn, Emerald snack nuts, Kettle Brand chips, and Diamond of California snack and culinary nuts. The company holds the distinction of being one of the nation's largest sellers of packaged-nut products. But Diamond Foods also has its chips department to diversify its food portfolio, which is especially helpful when water becomes scarce for nut-growing. Diamond Foods' snacks segment is enjoying strong growth and is helping to boost the corporation's margins.

Over the last few years, the company has been mounting a more aggressive campaign in its market, including the acquisitions of the Pop Secret and Kettle Brand franchises in 2008 and 2010, respectively. The leadership at the helm of Diamond Foods is obviously not afraid to seize a strategic opportunity when they see one, which has helped the company to generate revenue in light of increasing competition and a large accounting scandal in 2012.

Diamond Foods has been able to recover slightly after its stock took a thrashing from the market's initial recoiling from the fiscal chicanery, a sign that investors are rewarding the company for its efforts and pricing in future growth potential. As the months progress, Diamond Foods management will hopefully be able to put the scandal behind themselves and continue to grow the company.

The drawbacks
However, despite Diamond Foods' potential and positive points, there are some glaring warning signs investors should consider. The 2012 accounting scandal is still impacting Diamond Foods' earnings reports, which makes it more difficult to assess the company's true financial position. As the example of JPMorgan Chase goes to show, government penalties can put a severe dent in a company's financial performance. As Jacob Roche of the Motley Fool reported: 

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 [earnings before interest, taxes, depreciation, and amortization]...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.

Also, unfortunately for Diamond Foods, its nuts operations, which accounts for almost half of the company's sales, is going in the wrong direction. Increased competition and a severe drought in California have both combined to put considerable pressure on Diamond Foods in its traditionally robust nuts department. Unless management decides to concentrate production in its high-margin snack foods, Diamond Foods' nuts production will continue to wilt under the heat of the drought. At this time, management does not seem to be taking the route of focusing on snacks.

Finally, I'm concerned about how the market is remarkably bullish on the stock despite the fact that the company is still struggling to get back on its feet. The market is seemingly pricing Diamond Foods' stock very optimistically when the company isn't exactly out of the woods yet. With Diamond Foods still reeling from the aftershocks of the accounting scandal, a nuts segment under pressure, and increasing competition, I'm content with simply keeping tabs on the company for now, as I'm skeptical of Diamond Foods' ability to generate shareholder value for the long term.

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.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3035950, ~/Articles/ArticleHandler.aspx, 10/20/2014 9:22:34 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement