Why I'm Nutty for This Stock

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

Diamond Foods (NASDAQ: DMND) has been a tough stock to own over the past few years, and has likely left a sour taste in a number of investors' mouths. However, I'm a big fan of under-loved stocks. There are only seven Wall Street analysts following the stock, all with a "hold" rating. And the stock is down nearly 80% from its 2011 all time high of over $90:

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Back in 2011, Diamond was hitting on all cylinders and working on negating the purchase of the Pringles brand from Procter & Gamble. However, as an accounting scandal related to the timing of payments to nut growers surfaced, Kellogg (NYSE: K) was able to slide in and snatch up Pringles. Kellogg bought Pringles for a cool $2.7 billion.  

Diamond is now offering investors a 2.7% dividend yield and appears to be a solid pick in the small-cap industry, with a $450 million market cap. The company is known for its nuts, including the Emerald brand. Diamond also has a snacks segment, which includes the Kettle and Pop Secret brands.

I believe the overhang from the accounting issues are now in the past. At the end of 2012, Diamond restated 2010 and 2011 financials. In June, Diamond posted EPS for the fiscal 3Q of $0.05, compared to a $0.22 loss for the same quarter last year.

This comes as the company has been undergoing various cost-reduction measures. EBITDA was doubled year-over-year to $23 million for the 3Q compared to the $11.2 million in the same quarter last year. The other benefit to Diamond is its nut-roasting facilities and patented glazing technologies.

Chocolate covered nuts? 

With a sub-$500 million market cap, there's no denying the thought that Diamond might be a buyout candidate. The company has one of the best positions in the nut market and would be a great addition to any snack-food company's portfolio. Diamond's products are sold in more than 60,000 retail locations in the U.S. and overseas in more than 100 countries, primarily in Germany, Japan, Spain and Italy. 

What goes great with almonds and nuts? Chocolate. Hershey (NYSE: HSY) is best known for its indulgent chocolate snacks.

Owning over 40% of the U.S. chocolate market, Hershey is turning to international markets. This includes tapping China, India, Indonesia, the Middle East and Brazil. This comes as the number of middle-class consumers is on the rise in these countries. Of these countries, its focus is China, which has one of the fastest growing middle classes -- Hershey expects the country to become the fifth- largest global confectionery market by 2016.

Nuts for your cereal? 

Kellogg is over a century old and is known for its cereals, but also has various snacks that include the Pop-Tarts, Eggo, Nutri-Grain, Keebler, Cheez-It, and Famous Amos brands.

With the Pringles acquisition, the company now has a robust portfolio of snacks and cereals. Its focus has been brand-building and what better way to build a brand than via acquisitions. Granted, the company's cash position and debt might make a Diamond acquisition a bit prohibitive. 

Before Pringles, Kellogg was virtually a U.S. snack-foods company, but the Pringles deal has given it a global presence. What's more is that the Pringles deal gave the company $20 million synergies in 2012, and is expected to provide $50 million to $75 million going forward. 

Kellogg is now focusing on building its business in the emerging markets of Asia, Central and Eastern Europe and Middle East. This is a big move as the U.S. cereal market becomes saturated; all the more reason that it could prove useful for Kellogg to look to other snacks, i.e. nuts.  

Bottom line

All in all, I like Diamond as a buyout target first, but also as niche play on the snack market. Diamond's nuts are a higher priced snack food than, say, your chocolate bar, but it's also more healthy.

Two tailwinds for the stock include:  (1) the rise in income and employment; (2) and the rise of the health-conscious consumer. Both positives for Diamond. On the other hand, Hershey and Kellogg both appear to be solid investments even if they decide not to buy Diamond. I think Hershey will continue to benefit from a rebounding economy, while Kellogg is yet to fully realize the benefits of its Pringles acquisition. 

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Marshall Hargrave owns shares of Diamond Foods. The Motley Fool has no position in any of the stocks mentioned. 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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