Is It Time For Investors To Snack On Diamond Foods?

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The nut company, Diamond Foods (NASDAQ: DMND)saw its stock fly up over 15% earlier this month after a filing with the SEC showed that BlackRock held a 7.85% stake in the snack food company. With the investment firm giving Diamond such a vote of confidence, is it time for investors to have a look at the company? Quite possibly so.

The stock is still down 30% over the last twelve months. What's more is the stock is down over 80% since its September 2011 all-time high. The stock was soaring in 2011 after announcing the potential acquisition of Pringles from Procter & Gamble. Shortly after announcing the acquisition, questions were raised about the timing and accounting of Diamond's payments to walnut growers. Troubles worsened when the SEC opened an investigation in December 2011, then speculation pushed the stock down more when billionaire investor and activist David Einhorn was rumored to be shorting the stock. Toward the end of 2012, Diamond ended up restating its 2010 and 2011 financial results, admitting that it accounted for payments to walnut growers in the wrong period. Notable value investor Diamond Hill sold off some of its Diamond Foods stake last quarter (see other Diamond Hill sales), but billionaire investor Bill Gates took a new stake in the food company during the third quarter (see all of Gates’ newest picks).

Diamond Foods is a niche food company, selling its products via three brands:  Emerald, Pop Secret, and Kettle Brand. The limited product diversity is a bit concerning, but I remain confident the company will continue its search for a new product line, despite its failed attempt to buy Pringles. After Diamond's failed attempt to buy Pringles, Kellogg (NYSE: K) swooped in and gobbled it up for a cool $2.6 billion. The Pringles line has since been positive for Kellogg, giving the company solid international exposure. Last quarter, Kellogg saw international sales up 15% year over year, but up only 1% if you back out Pringles.

Other major food companies include Kellogg, Mondelez International (NASDAQ: MDLZ) and General Mills (NYSE: GIS)Kellogg recently upped its 2013 earnings estimates to $3.85 from $3.84, in part due to favorable implementation and results from Pringles. Mondelez is a spin-off from Kraft Foods, and now owns the Kraft Foods line, except the North American grocery business. General Mills recently acquired (2011) a controlling interest in Yoplait's yogurt business, and a Brazilian company. The break into the yogurt business should be a long-term positive for General Mills. Post Holdings was spun off from the private-label food company Ralcorp Holdings in 2012. Post is also another niche food company, making breakfast cereals that includes Honey Bunches of Oats, Pebbles, and Grape Nuts. Post has seen declining volume in recent quarters amid slightly higher average selling prices. During the fourth quarter, Post Holdings posted earnings of $0.23 per share, down from $0.37 per share, a year earlier. 

From a valuation standpoint, Diamond's price to earnings is coming more in line after having posted negative earnings for a number of quarters. However, worth noting is that Diamond is very cheap on a price to sales basis:

P/E (next year earnings)

  • Diamond Foods 21x
  • Mondelez 17x
  • General Mills 15x
  • Kellogg 14.5x
  • Post Holdings 22x

Price to Sales

  • Diamond Foods 0.4x
  • Mondelez n/a
  • General Mills 1.7x
  • Kellogg 1.5x
  • Post Holdings 1.3x

Don't be fooled

The average price to sales ratio for the three major snack food companies (General Mills, Kellogg, Post Holdings) is 1.5. Based on analysts' estimates for fiscal year 2014 sales of $951 million, and a peer average price to sales multiple on those sales, suggests the upside could be as much as 65% over the next year and a half. This would put the stock back up to prior to accounting 'scandal' levels, but the company has already restated its financials. Although the Pringles debacle keeps Diamond's product offerings limited, Wall Street analysts' still expect the company to grow robustly, above other major snack food companies, which could make the company a solid buy in the industry. Check out how Diamond's growth stacks up against competitors: 

5-Yr. Expected Earnings Growth

  • Diamond Foods 13%
  • Mondelez 12%
  • General Mills 8%
  • Kellogg 7%
  • Post Holdings 8%

mhargra has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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