On October 30, 2012, Road Less Invested published this article on Diamond Foods Inc. (DMND). This analysis was some of the best I've seen on DMND, and just goes to show that you don't have to be an expert fraud examiner to have realized something was wrong with DMND. The company clearly has some problems with it: the fraud investigation (dealing with timing of revenue and costs), dismissal of the CEO and CFO due to the fraud, and the fall-thru of the Pringles deal with Procter & Gamble (PG). All of this led to over an 80% drop of the stock price from its all-time high:
How can an investor or even a trader value this kind of company given these problems? The easiest and safest answer would to not even bother and stick to the sidelines. From a risk standpoint, that is an obvious choice. However, there is potential risk:reward as a speculative play if one is willing to stomach the potential downside. A typical valuation would be done using the financial statements, but because these are not available or reliable, a trustworthy valuation cannot be done. In times when there are accounting scandals or problems with income statements, valuations can be done using the Price:Sales approach. This approach has its limitations but is the only viable source.
I have listed here some facts that we do know about DMND:
- As of October 30, 2012, DMND's share price is $18.49
- DMND has 22.06M shares outstanding
- Pringles was bought by Kellogg (K) from Procter & Gamble for approximately $2.7B, or roughly 1.8x sales.
- Dean Foods (DF) recently spun-off its WhiteWave (WWAV) division, showing the trend of breaking up to create value for shareholders of food companies.
- Kraft Foods Group (KRFT) spun-off its snack-division, Mondelez International (MDLZ) on October 1st.
- Since its spin-off, MDLZ has an average P/S of 0.89. (Source: Capital IQ)
- The short interest of DMND is about 42%.
- Pop Secret Acquisition: This closed on August 13, 2008. DMND paid General Mills (GIS) $192.5M for the brand. At the time, Pop Secret was estimated to have $150M in sales for the year and had trailing twelve month sales of $103.01M. Pop Secret also contributed $20.84M to GIS's income. Given the price of the deal and the expected $150M in sales for the year, generates a 1.267x P/S multiple (190/150) (Source: Capital IQ and this article).
- Kettle Brands Acquisition: This deal closed on March 31, 2010 for $616.22M, as DMND. DMND would assume $600M of debt for this deal. Kettle was generating $250.45M in revenue but had -$3.76M in net income. The company was bought from private equity firm, Lion Capital, LLP. The P/S value was thus 2.46x, compared to the 1.8x for PG's 'fire-sale' of Pringles to K (Source: Capital IQ and this article).
- Harmony Foods Acquisitions: This was really the purchase of a facility for $18M and is not material enough for this purpose.
- Prior to 2008, when DMND was solely in the business of selling nuts, it had $531.5M in sales at the end of FY2008 and traded at an average P/S ratio of 0.57 (Source: Capital IQ):
Thanks to Road Less Invested, one can see that DMND's sales really did not grow and are questionable. Thus, one has to assume growth was 0% across all segments. What I am getting at here, is the question on whether or not DMND's sum-of-the-parts are worth more than the stock price? In other words, is breaking up good for the shareholder?
If you use the 11 facts that I listed above, the assumption of 0% growth, the multiples within the facts, one can obtain the valuations below for each segment. In any analysis I do, I like to have a bear, base, and bull case scenario so that I may have a range of where a company could be trading. My base case assumes 0% growth and the same multiples as when purchased still apply today (note: Kettle One's multiple is based on the Pringles sale multiple of 1.8). My bear case assumes sales for each segment have dropped 5% in each segment and that the multiple used is only 75% of the base case multiple. My bull case assumes sales for each segment have increased 5% in each segment and that the multiple used is 125% of the base case multiple. Here are my calculations below:
One can clearly see, that there is value to be had. Granted, this approach is based on a few assumptions, some outdated revenue values, and that it doesn't incorporate or discount the debt amounts which is $24.10/share. However, that is not the main point of this article. It is to show that there is value in the brands that DMND has that should enable the stock price to have some positive catalyst moving forward.
Diamond's best bet moving forward is probably for recent investor, Oak Tree Capital, to take the firm private once the SEC and other investigations are completed. They have an interim-CEO in place now that has sold a public business to a private enterprise, thus this move seems very possible given the CEO's experience with this. A buyout of this company seems the best situation for shareholders at this point, which hopefully the premium paid would be enough to cover the value of these brands.
Additional disclosure: This long position is merely a speculative play. The amount I own is immaterial to my portfolio, only 10 shares. I bought this on speculation, for some fun with watching this company, and the belief that at these levels, the company is oversold. Any movement in share price does not materially affect my portfolio, thus promoting DMND up is not helpful to my cause.