Diamond Foods May Outperform Coca-Cola, General Mills

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Includes: DMND, GIS, KO, PG
by: Takeover Analyst

What follows is a list of food & beverage-related companies that receive different overall ratings on the Street. They all have very low betas, and are thus not vulnerable to the swings in the macroeconomy. At the same time, two of them - Coca-Cola (NYSE:KO) and General Mills (NYSE:GIS) -- offer reasonable dividend yields of around 3%. Not surprisingly, these two firms also have strong brand names and are thus attractive defensive plays against a double dip. Diamond Foods (NASDAQ:DMND) fell a staggering 36.9% last week off of the announcement from its audit committee that payments to walnut growers were not appropriately accounted for. I find that this reaction was far overblown. Based on my multiples analysis and DCF model, I find the strongest upside at scandal-plagued Diamond Foods.

Coca-Cola

Coca-Cola is rated a "strong buy" on the Street and trades at a respective 12.6x and 16.7x past and forward earnings with a dividend yield of 2.8%. It has a beta of 0.5 and a free cash flow yield of 2%.

Consensus estimates for Coca-Cola's EPS forecast that it will grow by 6.5% to $4.09 in 2012 and then by 10.3% and 11.3% in the following two years. Modeling a CAGR of 9.3% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $64.05, implying 6.3% downside. The firm has addressed competitive pressures in the Middle East-- where PepsiCo has a dominant market share -- by acquiring a half interest stake in Saudi Arabia's Aujan Industries. With strong third quarter results, Coca-Cola has strong momentum to hike up advertising.

General Mills

General Mills is rated a weak "buy" on the Street and trades at a respective 16.6x and 13.8x past and forward earnings with a dividend yield of 3.1%. It has a beta of 0.2 and a free cash flow yield of 2.7%.

Consensus estimates for General Mills' EPS forecast that it will grow by 4.8% to $2.60 in 2012 and then by 8.5% and 8.9% in the following two years. Assuming a multiple of 18x and a conservative 2013 EPS of $2.77, the rough intrinsic value of the stock is $49.86, implying 27.8% upside. The firm may have mixed earnings expectations in the third quarter, but top-line momentum is strong. Bakeries and Foodservice revenues grew 12%, outperforming the broader industry. The firm is now introducing new products to boost demand and has had tremendous success in driving double-digit growth rates for lactose-free dairy products.

Diamond Foods

Diamond Foods is rated a "hold" on the Street and trades at a respective 16.5x and 10.4x past and forward earnings with a dividend yield of 0.5%. It has a beta of 0.3 and a free cash flow yield of 4.2%.

Consensus estimates for Diamond Foods' EPS forecast that it will grow by 13% to $2.95 in 2012 and then by 19.3% and 10.8% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $3.46, the rough intrinsic value of the stock is $51.90, implying substantial upside. Following Thursday's plunge, Procter & Gamble (NYSE:PG) is reportedly trying to terminate the sale of its Pringles business to Diamond Foods. Analysts, of course, are busy reworking estimates and recommending caution. But for those who are willing to swallow the risk, this firm has tremendous value potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.