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Diamond Foods: DMND Is On the Road to Recovery

DMND is up 75% year-to-date as its business continues to recover

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Diamond Foods (DMND) announced fourth-quarter earnings after yesterday’s close. And while investors weren’t happy — the stock gapped down 6% this morning — there’s still plenty to like about this stock.

Two years ago, the bottom fell out of DMND after the company was forced to postpone its purchase of Pringles from Procter & Gamble (PG). Ultimately, P&G terminated the deal, and Pringles was sold to Kellogg (K) for $2.7 billion.

Despite its near-death experience in 2011, Diamond Foods has made an impressive recovery in 2013, gaining 72% year-to-date. Let’s take a closer look at the company to see what investors are missing.

The Past

Diamond Foods’ stock dropped 70% in the span of two months between September and November 2011. Its former CEO and CFO lost their jobs over improper accounting regarding payments to walnut growers. By May 2012, the board hired a new CEO and obtained a $225 million cash injection from Oaktree Capital Management (OAK). The Los Angeles-based private equity firm got a sweet deal: Senior unsecured notes paying 12% interest along with warrants to purchase 4.4 million shares at $10 each.

With money in hand, CEO Brian Driscoll — who was hired from Hostess and once ran Kraft’s (KRFT) sales department — went to work regaining the trust of walnut growers and investors alike. As part of its plan, management sought to rebuild its walnut supply and re-positioning the Emerald brand from 250 stock-keeping units down to 90. It also substantially increase the amount it spent on marketing, advertising and promotion for its four main brands and optimized its cost structure to save at least $35 million per year.

Although its overall revenues have dropped by a significant amount, its margins have recovered to pre-crisis levels.

The Present

Diamond’s stock dropped almost 5% in after-hours trading on its weak outlook for the first quarter. The company “expects to face significant sales and contribution headwinds including costs associated with the Emerald re-launch and lower walnut supply.” With markets up more than 20% year-to-date and investors sporting itchy trigger fingers due to the potential shutdown of the federal government, any negative news means red numbers at this point.

But from a broader perspective, how is the company really doing?

Article printed from InvestorPlace Media,

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