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Are You Nuts for Liking Diamond Foods, Inc. (DMND)?

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When a stock’s share price is lower than a North Dakota thermometer in February, investors tend to give it the cold shoulder. But as fortunes change and the market warms to a stock’s prospects, its price can heat up in a hurry. Unfortunately, it’s hard tell that a stock is melting investors’ hearts until after it’s made that upward leap.

Diamond Foods, Inc. (NASDAQ:DMND)Taking the market’s temperature
But using Motley Fool CAPS’ proprietary ratings, aggregated from the opinions of the 180,000-member-driven investor community, can help us find previously low-rated companies that recently enjoyed a bump in investor confidence. We can see whether they’re truly heating up — or headed back to the deep freeze.

Nut grower Diamond Foods, Inc. (NASDAQ:DMND) is looking to put its recent ignominious past behind it, and investors are responding to the change, with even investment house BlackRock taking an 8% stake in the company. Since we’re all probably familiar with the accounting shenanigans that led Diamond to its low state, let’s see if the market is nutty for changing its outlook on this stock.

Caution: Contents may be hot
Although its hopes of becoming a major snack-foods company were dashed following the accounting brouhaha last year when it lost The Procter & Gamble Company (NYSE:PG)‘s Pringles business to Kellogg Company (NYSE:K), that doesn’t mean Diamond has given up on the segment. It has two popular snack-food brands in the Kettle chip and PopSmart popcorn businesses, and those two were largely responsible for keeping last quarter from becoming a complete disaster.

Snack revenues jumped 7% to $105 million last quarter and now account for 48% of revenues, up from 37% last year. Although that’s predicated on the worsening situation in its nut business that saw sales tumble 30% to $115 million, Diamond Foods, Inc. (NASDAQ:DMND) remains intent on repositioning itself as a snack-foods company, particularly since it’s responsible for more than two-thirds of company profits.

Last summer, Diamond attempted to speed up market-share gains by engaging in a bit of promotional activity around the Kettle brand, only to have it backfire because it undermined the chip’s premium positioning. When the market researchers at Nielsen surveyed what consumers were buying in 2012, they found Kettle and Emerald sales actually declined because of it. The nut grower was forced to backpedal and reduce what it termed “inefficient discounting,” which fortunately helped sales rise.

DMND Revenue Quarterly YoY Growth Chart

DMND Revenue Quarterly YoY Growth data by YCharts.

Good intentions aside, getting Diamond Foods, Inc. (NASDAQ:DMND) to be more than just a gem in the rough isn’t going to be easy. Competition for limited consumer dollars is filled with a lot of sharp elbows following a period of consolidation in the industry.

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