As many of my past articles have described, Diamond Food's (DMND) brands make the case for a turnaround in DMND. DMND has gone through a tumultuous run over the last few years. Many investors from 2011 have a bad taste in their mouths since the stock falloff due to the accounting scandal and Pringles deal termination.
However, it seems as though the turnaround is coming for this beaten down stock. Value investors should be salivating over this potential speculative play. This is no Dell (DELL) or Hewlett-Packard (HPQ) value play, as the company's products are still in demand and have solid positions in their respective markets. Fellow contributor, Timothy Phillips, posted this article. The article stems from the 8-K filed on February 26, 2013 by DMND. Management released their Q2 presentation earlier than the March 11, 2013 presentation. In his article, Tim points out what management is going to say on the Q2 call and the implied sales values for each brand:
DMND last reported ttm sales of $952.5M, which is down from Q1 2011 ($1.2B) and FYE 2012 ($981.4M). However, if management is correct on the market share here that is provided by Nielsen, DMND could have sales of roughly $1.2B or a 33% increase in sales Q/Q! The question remains, what are the value of the brands and does the thesis that the sum-of-the-parts of these brands give a value than the current stock price. I still believe that the brands valued separately are worth more than the current stock price based on what management provided for their Q2 call.
Based on the market shares and assumed category growth continuing, DMND's sales for each brand could be the following:
There are many assumptions, such as continuance of category growth and market share maintaining a +/- 200 bps swing, but it gives potential insight into DMND.
Value of the Brands
As stated before, valuing the company has been a challenge. Each brand should be taken separately and DMND's team here has given implied sales values. DMND competes against a variety of firms in each brand's segment, including John B. Sanfilippo & Son (JBSS), PepsiCo's Frito-Lay division (PEP), Inventure Foods (SNAK), J&J Snacks (JJSF), Boulder Brands (BDBD), Synder's-Lance (LNCE), and Kellogg (K).
Nuts: Diamond and Emerald
DMND is the largest nuts producer, despite the recent decline in sales. It really only has one publicly traded competitor in this space, namely JBSS. Nuts fit the 'health' trend going on in the US, as they are high in protein. Emerald is a huge brand that had many SKUs but management is consolidating this down to create better efficiencies and thus higher profit. Based on the current P/S multiples, DMND's nut businesses could be worth anywhere from 0.27x to 0.38x sales (Source: Capital IQ):
Based on these multiples and the implied sales values for Diamond and Emerald, the two brands are worth the following by using industry and DMND-only approaches:
If it was assumed that the market shares for each brand stayed within 200 bps each way and that the category growth continued to grow at the current pace, the forecasted value of the brands based on the industry multiples are:
"Get Your Popcorn Ready": Pop Secret
Pop Secret was acquired from General Mills (GIS). Pop Secret is a leader in the popcorn space, with the number two brand position. Pop Secret has been the best highlight and brand for DMND over the last year. It competes against Orville Redenbacher and other popcorn brands, private label popcorn brands, and substitutable products. These are made by companies such as JJSF, LNCE, and BDBD. The segment has traded at 1.02x through 1.33x ttm sales (Source: Capital IQ):
Based on these multiples and the implied sales values for Pop Secret, the brand is worth the following by using industry and DMND-only approaches
Pop Secret has been stealing market share. In fact, the trend for its market share is on a straight line for further market share appreciation (Source: Nielsen):
In other words, Pop Secret should have a 24.33% market share based on this simple regression analysis by next year's FYE. If it was assumed that the market shares for Pop Secret stayed within 200 bps each way of this forecast and that the category growth continued to grow at the current pace, Pop Secret's forecasted value on the industry multiples are:
Chips: Kettle Brands
Kettle was a large acquisition for the previous management team. It is a great brand to have but has been a problem due to the lack of profitability in the past with it and the large debt level incurred from the acquisition that is coming due. It competes against Frito-Lay , Kellogg's Pringles , LNCE, and SNAK. The industry has traded in the range of 0.97x to 1.09x ttm sales (note: some of these companies have a diverse product base and the multiple does not solely apply to their brands - Source: Capital IQ):
Based on these multiples and the implied sales values for Kettle across all three parts, the parts are worth the following by using industry and DMND-only approaches:
If it was assumed that the market shares for Kettle stayed within 200 bps each way of this forecast and that the category growth continued to grow at the current pace, Pop Secret's forecasted value on the industry multiples are:
If one were to take the values provided above for each method on a P/S basis, the value for DMND would be the following:
The value of the brands are worth more than the current share price based on the industry's and DMND's P/S. This takes into account the implied revenue values that management is providing in its Q2 call. If the category growth were to continue and market shares to remain relatively the same, DMND in theory is worth more than double where it is currently. What do I think DMND's share price should be? I believe Pop Secret is an undervalued brand here and that Kettle, Emerald, and Diamond will be weak points for DMND moving through 2013. Emerald will have a turnaround and become a driver next fiscal year. However, nuts are not the space. Based on this and the forecasted revenue values, I think DMND is worth:
Why is it I think DMND's worst days are behind it? Looking at its gross profit margins over the last 3 years on a quarterly basis provides a lot of insight (Source: Capital IQ):
Q1 typically has higher profit than the other quarters, except for FY 2011. Q1's GPM has appeared to bottom in FY12 as FY13's Q1 GPM was higher. On top of this, one should notice how the GPM trends upward from Q2's typical drop from Q1 (with the exception of 2011 again). This is especially the case in 2012 as GPM greatly improved Q/Q. Is this a sign for the future to come? It would appear so.
The ace-in-the-hole DMND has is still the ability for it to be taken private. There are a few anti-takeover provisions in place if some holder were to acquire 15% or more of the common shares. The plan would issue one preferred stock purchase right to each common share. Each right would entitle the purchaser to 1/100 of a share of Junior Preferred Stock. The rights do expire in March 2015 unless the Board extends this. In its most recent 10-K, it was stated, "Because the rights may substantially dilute the stock ownership of a person or group attempting to acquire us without the approval of our board of directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors regarding such acquisition" (Source: DMND 10-K). Notably within this aspect, "In connection with the sale and issuance of notes and warrants to Oaktree, we amended the stockholder rights plan to exclude such securities from triggering such rights plan" (Source: DMND 10-K). In other words, the Board could still approve a takeover, especially one by private-equity firm, Oaktree.
DMND still has many problems with it and many more issues to sort through. However, management has highlighted FY2013 as the turnaround year. It may not be 2013 but could be 2014 instead. The likely case is that 2013 will be the turnaround for this company. It will need a good harvest for a good walnut supply and will need to create stronger efficiencies. The values of its brands separately are worth more than the current stock price and the potential of it being acquired is still there. Hopefully, Q2's call will highlight some of these points and the potential turnaround.
Disclosure: I am long DMND.