Editor's note: This article has been updated to account for Diamond Foods' co-op structure prior to its 2005 IPO.

Margins matter. The more Diamond Foods (Nasdaq: DMND) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Diamond Foods' competitive position could be.

Here's the current margin snapshot for Diamond Foods and some of its sector and industry peers and direct competitors.


TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Diamond Foods




 Kraft Foods (NYSE: KFT)




 Ralcorp Holdings (NYSE: RAH)




 ConAgra Foods (NYSE: CAG)




 John B Sanfilippo & Son




Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Diamond Foods has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Diamond Foods over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.
(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 51.2% and averaged 24.1%. Operating margin peaked at 39.3% and averaged 11.3%. Net margin peaked at 39.5% and averaged 9.9%.
  • TTM gross margin is 24.3%, 20 basis points better than the five-year average. TTM operating margin is 9%, 230 basis points worse than the five-year average. TTM net margin is 3.8%, 610 basis points worse than the five-year average.

Diamond's margins have fallen off a cliff since 2005. However, when it switched from a co-op company to a public company, it had to start accounting for the nuts it sold. Before then, the nuts had not been included in costs of goods sold, driving margins up. Since that accounting change in 2006, Diamond's margins in each category (gross, operating, and net) have moved up more or less steadily, as you can see in the graphic. In fact, those margins now sit above their averages since the accounting change.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at Diamond Foods? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has a disclosure policy.