The Diamond Foods Buyout

May. 2.12 | About: Diamond Foods, (DMND)

With exceptional business fundamentals trading at a deep discount, Diamond Foods (NASDAQ:DMND) is looking to be an attractive acquisition target.

Strong Fundamentals

First, some context. Diamond Foods continues a path of rapid growth in revenue and profitability, through its brands consisting of Emerald Walnuts, Pop Secret, and Kettle Chips. With consumer tastes shifting towards healthier and organic snacks, Diamond Foods is positioned perfectly to reap in industry leading profits.

The numbers make the case clear: Since 2005, margins have almost doubled for Diamond Foods. In the last three years alone, revenue has increased by almost 70%.

Acquisition Opportunity

Why is Diamond Foods an attractive acquisition target? The Wall Street Journal illustrates the accounting scandal that, since its inception last fall, has left DMND stock to drop more than 70%. The result is a company with solid business fundamentals that is trading at attractive multiples, with an EV/EBITDA ratio of 8.14 and an EV/EBIT ratio of 10.74, relative to the industry averages of 11.11 and 14.81, respectively.

Given that Diamond Foods, with all its growth, is trading at a deep discount, several CEOs, including that of Kellogg (NYSE:K), have indicated interest in acquiring Diamond, because of its exposure to the highly profitable and rapidly growing healthy snack foods segment. Moreover, following the accounting scandal, Diamond Foods appointed a new CEO and CFO. Both carry strong track records of leading companies to acquisition. The CEO, Rick Wolford, led the sale of Del Monte foods to a group of Private Equity firms, including KKR.

Diamond Foods is certainly looking to increase its liquidity, given the one-time costs that it faced as a result of the accounting scandal. Selling itself would solve such a problem, as a potential buyer is likely to pay a high multiple of EBITDA for the lucrative business that Diamond Foods operates.

Most importantly, the risk/reward of buying into Diamond Foods now is convincing, as creditors still have confidence in the firm, as illustrated by a lower-than-expected increase in borrowing costs. Meanwhile, Management is committed to strengthening the balance sheet of Diamond Foods, as shown by the possibility of selling a minority stake to Private Equity firms KKR and TPG Capital.

The Verdict

If Diamond Foods gets acquired, investors who buy in now will be nicely rewarded. If they don't get acquired, investors who buy in now will have purchased attractive growth for a great price. That is an opportunity that is too good to miss out on.

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