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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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Actually, if you read the rest of its outlook, it’s quite good: “Despite expected increases in tree nut costs, fiscal 2014 is expected to be a year of earnings improvement as additional benefits from the execution of the multi-year turnaround strategy are realized.” Furthermore, the Q4 numbers actually show an improving business when compared to the numbers in Q4 2012.

But to be objective, you have to put aside revenues for its nut segment. By themselves they’re admittedly awful — down 23.4% year-over-year to $426.1 million. However, its adjusted EBITDA actually increased 28% in fiscal 2013 to $101.7 million when excluding one-time expenses such as the $96 million for its securities class action settlement. In addition, sales for its snacks segment increased 3% year-over-year to $438 million, gross profits were up 18.7% to $152.1 million, and its gross margin improved 460 basis points to 34.7%.

On the whole, DMND is in much better shape today than when things went south two years ago.

The Future

Last Thursday, BB&T upgraded DMND’s stock from “hold” to “buy” with a $28 price target. In a note to clients it stated: “Investors will be left with an attractive, instituted cost savings program, improving margins, and in our opinion, a potential takeout candidate.”

Why a potential buyout candidate? Diamond’s Pop Secret brand is number two in market share, Kettle brand chips are number three in adult premium snacks, its Emerald Brand nuts are number three in the snack nut category, and Diamond of California is number one in culinary nuts used for baking.

As Diamond emerges from its accounting mess, you can’t help but think Kellogg would be interested in adding to its snack business beyond Pringles and the various cookie and cracker brands it owns. Other potential acquirers that might be interested in its brands include General Mills (GIS) whose snack food brands include Bugles and Nature Valley granola bars and Kraft Foods with Planters and Baker’s Chocolate.

Bottom Line

Regardless of whether Diamond Foods becomes an acquisition target in the next 12-24 months, I see its prospects in both its snack and nut segments continuing to improve. In the Q&A for its Q4 conference call, Driscoll indicated that 2014 revenue growth for its snacks segment will be about 3% with its nut business experiencing a decline much less severe than the 25% in 2013. Put those together and it’s almost certain profits will improve in 2014. Factor in another year of new cost saving policies, and DMND should grow exponentially on top of that.

As far as valuation is concerned, I don’t believe there’s a packaged foods company trading for less. If its stock drops below $20, I’d be buying like crazy. If not, I’d still be buying. DMND hit the bottom and is on the rise. From where I sit the future looks bright indeed.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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