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Summary

  • Shares of Diamond Foods have fallen some 30% in recent weeks.
  • A general correction and soft third quarter results are too blame.
  • No apparent value as the correction followed very strong and unfounded optimism earlier.

Investors in Diamond Foods (NASDAQ:DMND) have seen a very rough week. On the back of the company's earnings release in the first week of June, shares have lost over 20% of their value.

This came after shares have seen a great deal of momentum over the past year despite lack of real tangible evidence of the recovery in the actual numbers being reported by the company. I continue to shun shares despite the recent sell-off.

Soft Third Quarter Earnings

On the 5th of June, Diamond Foods released a soft set of third quarter results. The company posted a 3.2% increase in its revenues which came in at $190.9 million. Despite the increase, revenues fell short compared to consensus estimates at $191.7 million.

The company posted a huge $105.6 million loss compared to a much narrower loss of $15.6 million as reported last year. One-time items again hit the bottom line hard as discussed next.

Non-GAAP adjusted earnings came in at $0.11 per share, falling six cents short compared to consensus estimates.

Looking Into The Numbers

Sales growth has been driven by the snack business which posted a 9.6% increase in its sales to $114.3 million. Nuts sales were disappointing, falling by 5.0% to $76.6 million.

Thanks to the sales leverage, Diamond Foods managed to boost gross margins by 20 basis points to 23.6% of sales. Snack gross margins were up by 130 basis points to 36.5% of sales. Gross margins at the nuts business fell by 390 basis points to 4.4% of sales.

The huge GAAP loss was driven by the re-financing of debt, including Oaktree notes and related warrants. In total this cost the company $83.0 million. The warrant exercise fee of $15 million related to the refinancing hit the bottom line hard as well. Adjusting for these costs non-GAAP earnings came in at $3.5 million, or $0.11 per share.

Outlook

The company's outlook is very much narrowly defined. Despite the increase in tree nut commodity costs anticipated for this year, Diamond Foods expects adjusted EBITDA to increase compared to 2013.

Third quarter adjusted EBITDA of $23.5 million came in marginally ahead of last year's adjusted EBITDA of $23.2 million. So far this year, Diamond reported $81.2 million in adjusted EBITDA, about 5.2% more compared to last year.

Valuing Diamond Foods

Diamond Foods ended the quarter with $635 million in net debt. To provide any liquidity, the company does have an undrawn liquidity revolving line of $125 million.

Revenues for the first nine months of the year came in at $646.1 million, down 2.7% compared to the year before.

Trading at $26 per share Diamond Foods is valued at little over $800 million. Adding back the debt results in an enterprise valuation of little over $1.4 billion, which still results in steep EBITDA multiples.

Given the difficult financial position of the firm, Diamond Foods does not pay a dividend.

Prospects For The Company

Diamond Foods is still suffering from the loss making nuts business which is reporting very poor gross margins and undoubtedly publishes large operating losses. The large leverage position of the firm is costly as well. The company already paid $41.5 million in interest for the first nine months of the year on a net debt position of $635 million at the moment.

Net interest costs fell to $10.6 million in the third quarter, which still results in a net interest cost of 6.7% per annum.

The bright spot is as usual the snacks business which is selling snacks under the Kettle and Pop Secret brands.

Slow Recovery From Accounting Scandals

Shares of Diamond Foods were once regarded as the hottest thing in town as shares have risen from levels around $20 in 2009 to highs of $90 in 2011. The announcement of the acquisition of Pringles send shares through the roof, in a deal which never occurred given the accounting issues which emerged.

The accounting scandals which involved dubious payments to walnut growers pushed share to lows of $15 at the turn of 2012 into 2013.

From these levels, shares have had seen a recovery to highs of $35 in April of this year, after which shares have lost nearly a third of their value again, currently trading at $26 per share.

Takeaway For Investors

Back in October of last year, I last took a look at the prospects for Diamond Foods with shares trading in the low-twenties at the time.

I concluded to stay on the sidelines as the company was facing bumps on the road to recovery, reporting falling sales at the moment while taking various "one-time" charges related to the accounting scandal and restructuring efforts.

The good news is that the cost of debt is coming down, yet operational profitability before factoring in leverage is suboptimal to say the least. This is of course still related to the very poor performance of the nuts business, which cannot be offset by a solid performance of the snacks.

I must say that I was already very surprised to see shares making such a run-up in recent months given the lack of tangible progress, something which has corrected itself in the latest sell-off. Execution risks continue as the struggles with nuts are far from over. At the same time progress is made in the company's leverage position.

I continue to shun shares as the share price performance continues to outpace operational improvements by a wide margin.

Source: Diamond Foods - Correction Is Justified After Previous Strong And Unfounded Momentum