Foolish Forecast: Diamond Foods Needs Polishing

Editor's note: This article has been updated to show quarterly performance data in the margins table and to reflect the source of analyst sales estimates.

A farmer's work is never done -- and an investor can find himself working almost as late. Tomorrow, for instance, investors in nut grower Diamond Foods (Nasdaq: DMND  ) won't get to bed till late. They'll need to wait for market close to hear the company's fiscal Q3 2006 earnings news, then take a few hours more to digest the results. Here's a bit of information to give them a head start.

What analysts say:

• Buy, sell, or waffle? Three analysts follow Diamond, and the one buyer of three months ago has now reconsidered; all three now say hold.
• Revenues. On average, they're looking for almost 5% sales growth tomorrow, to $83.8 million (according to Yahoo! Finance).
• Earnings. But still $0.21 per share worth of losses.

What management says:
Late last month, Diamond submitted an investor presentation to the SEC as an 8-K filing. In it, the company claimed a 14.1% U.S. market share in sales of snack nuts (its smallest revenue generator), but a whopping 38.9% share in revenue categories No. 1 and No. 3, culinary (i.e. retail baking), and in-shell. One of Diamond's main objectives, therefore, is to build on the brand recognition of its Diamond and Emerald names to increase its share of, and grow the wider market for, snack nuts.

Diamond also revealed its long-term goals of achieving sustained gross margins in the neighborhood of 20%, and operating margins of about 10%. Combining this with estimated long-term sales growth of 8% to 10%, Diamond aims to generate bottom line profits growing at about 15% per annum.

What management does:
The numbers that Diamond has been posting in the quarters since it came public show that the company has a tough row to hoe to hit those profitability goals. On a quarterly basis, the company turned profitable in the first quarter of FY 06, but its gross and operating margins remain far below where it ultimately wants to be.

Margins %	10/05	1/06
Gross	12.8	15.0
Op.	3.9	4.3
Net	2.3	2.5

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects quarterly performance for the quarters ended in the named months.

One Fool says:
Looking farther out, in May, after the close of the fiscal third quarter that we'll be hearing about tomorrow, Diamond announced an $18 million-dollar acquisition of certain assets of Harmony Foods Corporation, including the Harmony and Homa brands.

On the plus side, the acquisition gives Diamond a large, centrally-located (Indiana) processing facility which will, er, facilitate the swift delivery of processed fruits and nuts to certain key customers. Diamond also plans to close down its Illinois processing operations and consolidate them at the new plant, incurring $1 million in restructuring costs in the short term -- but yielding "annualized cost savings to Diamond of at least $2 million." Thus, the Illinois plant closure should pay for itself within six months. Diamond also plans to squeeze further efficiencies out of Harmony's operations, boosting their profitability to the new owner.

On the minus side, expect Diamond to take a $0.05 to $0.07 restructuring charge for the Illinois plant closure -- but that won't happen until next quarter.

Competitors	Customers
John B Sanfilippo & Sons (Nasdaq: JBSS  )	General Mills (NYSE: GIS  )
Kraft (NYSE: KFT  )	McDonald's (NYSE: MCD  )
Ralcorp (NYSE: RAH  )	Wal-Mart (NYSE: WMT  )

Kraft's sturdy dividend made it a Motley Fool Income Investor pick, while Wal-Mart made Philip Durell's list of bargain-priced performers at Motley Fool Inside Value . Try any of our Foolish newsletters free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above.