Will This Stock Bounce Back in 2013?

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Diamond Food (NASDAQ: DMND), a popular snacks maker, is facing a tough time and is losing its shine because of the accounting scandal and resultant loss in the fourth quarter. The company’s stock is currently trading at ~$14 which is down 56% year to date. It seems the company has a tough road ahead and will take time to come back on track. The probe into its accounting irregularities tarnished its image and lost its customers’ confidence and also casts a shadow of doubt over future investment returns.

The popular snack maker is under an investigation which revealed that there was an accounting mistake of $80 million in payments made to walnut farmers in 2010 and 2011. Diamond's walnut growers were paid in installments, with the final payment for the previous year's crop to be paid in the next year. In September, 2011 when the farmers were paid, it was not clear whether it was an advance for next year’s crop or the final payment of the last year’s dues.

The SEC opened an investigation and the Audit Committee exposed the whole scandal. It was then realized that what the company actually did was to postpone the recording of walnut acquired last year to the year of actual payment, thereby recording expenses in different periods and thus fictitiously reducing the overall cost to the company for that year. Along with that the company would initially budget a sizeable closing stock to increase the supply from farmers because more supply means reduced buying prices and later on reported lower inventory in its financials. Executive Bonuses were largely linked to the earnings of the company and the scandal helped them in maximizing yearly earnings.

This scandal forced it to lose its deal with Procter & Gamble as the company was about to purchase P&G’s Pringle's potato chips business for $3.25 billion. Kellogg (NYSE: K) took advantage of Diamond Food's accounting probe which delayed its deal for purchasing Pringle's Potato chips from Procter & Gamble. It purchased Pringle's for $2.7 billion, which increased its international presence by 2%. Furthermore with aggressive promotional activities Pringles captured 11% of the market share in the last quarter, which is considered to be the highest since 2009. Kellogg holds a strong product pipeline of Kashi Berry, Cinnamon Jacks, Special K Chocolate Strawberry and Mini wheat’s Crunch, Keebler and Nutri-Grain for 2013 which will help the company to generate growing revenue in the future. The company is also increasing its footprint in the emerging markets like China where it has made a joint venture with Wilmer International to make good use of the opportunity of the growing Chinese snack market. The Company’s stock is currently trading at $56.75 which is up 12% year to date.

On the other hand General Mills (NYSE: GIS) is giving it tough competition too. General Mills carries some of the best brands like Yoplait, Pillsbury, Progresso, Nature Valley and Cheerios. Its acquisition of Yoplait (which I have covered in my last post) ramped up its international sales and contributes 14% of revenue from the US. It also made another acquisition of Yoki, the company known for its aggressive promotional activities and which generates $550 million of sales every year. It has planned to introduce 70 new products in 2013 beginning out of which 35 will be in the yogurt category. Emerging markets like India and China are its key focus areas.

Coming back to Diamond Food, I see a rough ride for this stock ahead. The net sales of the company during the quarter decreased 5% to $224.0 million in 4Q12 from $234.71 million in4Q11. The main reason behind this reduction in sales was a sharp drop in its international non-retail sales which were down 85% to $4.56 million only in 4Q12 from $29.84 million in 4Q11 due to the major drop in delivery of walnuts to the company. Also, North American Foodservice/others were down by 22% from $11.96 million in 4Q11 to $9.37 million in 4Q12. The company’s stock price has been continuously declining all throughout the year. Though the company is making efforts to restore its damaged relationship with the walnut growers and also trying to cover up its loss by cutting down its overhead, I think the recovery will take a long time to show any impact on its financials.

 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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