Nuts and Bots - A Tale of Two Companies
Karl is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
(Editors Note: A previous version of this post stated that Diamond Foods' former CEO and CFO were fired due to an accounting fraud. The company's audit committee findings did not determine that fraudulent misconduct was committed by either executive, and the SEC and Justice Department cases are ongoing. The post has been corrected to reflect this information.)
It seems appropriate, only a month since Charles Dicken's 200th birthday, that someone once again misuses a Dickensian construction. In this case, the two companies are Diamond Foods (Nasdaq: DMND), a food company focusing primarily on branded packaged consumer products, and iRobot (Nasdaq: IRBT), a robot maker for the consumer, law enforcement and military markets.
If share value were the sole benchmark of comparison, then about a month ago, on Feb. 9, only two days after Dickens 200th birthday, these two companies would appear to be nearly the same company, with each losing ONE THIRD OF THEIR ENTIRE VALUE! On closer examination, however, the differences are striking.
Add to those differences this: Diamond, which was nearly four times its current share price at its all-time high, recently dismissed its CEO and CFO from their roles after an accounting scandal revealed improper payments to walnut growers. Shortly thereafter, the two key executives resigned from their positions on the company's board of directors. In addition, two years worth of financial statements will need to be restated, totaling eight quarters of recalculation.
iRobot, whose all-time share high was not even double its current price, fell based on an announced lower outlook for the next year. It had just posted record profits for its previous quarter and for the full year. No restatements necessary.
Fast forward to late March 2012; what do we know today that can add to this story?
Over the preceding month, Diamond Foods' hoped for acquisition of the Pringles brand was terminated - Pringles is instead to be acquired by Kellogg. More recently, it suspended its dividend, needed to reach a forbearance agreement with creditors (which it finally did) and is thought to have hired an advisor to “strengthen its balance sheet.” Unfortunately, there is already talk of probable covenant breaches on the forbearance agreements as the real spending and/or losses are calculated and the fake earnings evaporate into the ether. Possibly as a way to improve its poor situation and improve its balance sheet, one report has Diamond looking for potential outside investors through a potential private placement in public equity (PIPE). Finally, not surprisingly given its restatement situation, Diamond has received a Nasdaq Notice of Late Filing of Form 10-Q.
What about iRobot? iRobot has quietly announced a few new patents, partnerships and orders.
While both companies were treated similarly by the market on that day in February, what we choose to do from that point onward IS in our power. Take the market's quick, blunt, possibly inaccurate judgments and use them to choose investments, sorting investment ideas into groupings: follow up or not, short thesis or long, high probability or low, and long term or shorty. Don't let the market's decisions rule you, use them to enhance your investing efforts.
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