In anticipation of the Nasdaq hearing on July 26th, Diamond Foods (DMND) has tumbled about $2.50, or approximately 13%, in the past five days on lower than average volume. Yesterday it reached a four year low of $16.75. Usually when a stock is in freefall like this, a floor emerges as value investors start nibbling. So why isn't a big time value investor like Warren Buffett scooping up shares at such low prices?
The answer is uncertainty. Investors hate uncertainty, and Diamond hasn't given many updates with information about the company that really interests investors. Diamond does have the occassional fluff news like "Kettle Chips head chef travels the world to source flavors", and "Happy 30th Birthday Kettle Chips!" , but it doesn't say much for the bottom line.
Diamond's Nasdaq hearing will be this Thursday, July 26th. Investors are assuming the company won't have the income reports reinstated by then, because it has already said: "there was no guarantee that it would be able to file its reports with the U.S. Securities and Exchange Commission on the scheduled date."
So the question is, how much longer will it take the company to restate its financials? These restatements question Diamond's profitability. According to the audit committee investigation findings; "the Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods".
Since earnings was reported at $26.2 million in 2010, subtract $20 million from that and its earnings is updated to $6.2 million for 2010. Earnings was reported at $50.2 million for 2011, so subtract $60 million from that and we come to a $0.8 million loss for 2011.
More will come out of the woodwork than just an earnings restatement, since the audit committee also "identified material weaknesses in the Company's internal control over financial reporting".
Who knows when the accounting restatements will be concluded? It could take one to three more months depending on how much of a mess Diamond's accounting has been. Regardless of how long it will take, Diamond is still allowed to give updates and news that actually matter to its shareholders. In my opinion, the following are questions that the company should answer:
1. Diamond reported that it will now pay market rates to the walnut growers. How much more is the company paying for nuts now, and is it able to be profitable?
2. How is the company currently growing? Has the company signed any new contracts this year?
3. Has the company lost any customers since the accounting scandal came to the public eye? Will 2012 revenues match or beat 2011 revenues?
4. Has Diamond's new management found out why the former audit director, Joseph Silveira, reportedly committed suicide? The company should shed more light on this.
5. How has the company done versus its competitors in 2012? Is it losing or gaining market share?
6. Is the company still paying for premium shelf space for its products? How is that going for sales?
7. How much are capital expenditures for 2012? The company spent $12.5 million in CapEx for 2011. Seeking Alpha reader Walnutman claims that Diamond's walnut processing line is "borderline obsolete." Is that true and will the company need to update it anytime soon?
The above questions are unrelated to the accounting restatement. There is no reason why the Company can't answer those questions before the restatement is finished. As a Diamond shareholder, I would put pressure on management to come up with updates. A delisting and bankruptcy are a genuine concern for this Company.
Disclosure: I am short DMND.