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Why Diamond Foods’ Stock Has Gone Nuts

Payment to walnut growers has turned this stock on its head

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It’s easy to see why such importance is being placed on the Pringles deal. Diamond Foods gets a business global in scale with distribution to match. Currently, 58% of its revenues are in the snack category. Adding Pringles and its $1.4 billion in revenue would bump that up to 83%. Furthermore, it would go from selling 79% of its products in North America to just 54%. Pringles has manufacturing facilities in China, Malaysia, Belgium, the U.K. and Brazil, as well as several in the U.S. Most importantly, its EBITDA margins would increase by at least 200 basis points, making it the second-largest snack food company in the world. It’s easy to see why Mendes made the deal in the first place. It’s transformational.

Some of the growers interviewed by The Wall Street Journal might have a legitimate beef — or it could be sour grapes over a bad decision and signing away control over the price paid for their crops. It’s possible these growers resent the fact their businesses (10% of overall revenue assuming the Pringles deal went through) are no longer critical to Diamond’s success. That has to sting. Still, it’s amazing that these walnut growers, the company’s legacy, are willing to tear down all they’ve built over the timing of $50 million in walnut payments.

Regardless, Diamond Foods should be able to complete the Pringles deal despite any restatement that might occur. Procter & Gamble not only has a duty to shareholders to get a good price for the assets, which it did, but also to finally remove itself from the food business as stated in its business plan. I think only a glaringly obvious act of fraud on behalf of management will scuttle the deal. P&G wants this as much as Diamond does.

However, the future of Diamond Foods is bright with or without Pringles. As of Sept. 15, Diamond’s guidance for the first six months of fiscal 2012 is standalone (without Pringles) revenue of $540 million to $560 million and non-GAAP earnings per share of $1.65 to $1.75. Year-over-year it expects minimum revenue growth of 5.8% and non-GAAP net income by 4.4%. In a presentation it made in early September, all three of its snack brands (Emerald, Pop Secret and Kettle) are gaining market share — including outside the U.S. Diamond will find other snack food companies to buy, if not Pringles.

At this point, the professional money is staying on the sidelines. That doesn’t mean you should. On CNBC, trader Steve Grasso recommends investors should be buying upside calls, and I couldn’t agree more.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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