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Diamond Foods, Inc. (DMND): This Small Cap Food Business is Still Quite Expensive

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Diamond Foods, Inc. (NASDAQ:DMND) has experienced the gain of as much as 8% to hit $17.50 per share after reporting impressive earnings results, which beat both top line and bottom line estimates. In the first quarter 2013, investment guru Mario Gabelli bought 278,000 shares of the company. Let’s take a close look to determine whether or not we should invest in Diamond Foods, Inc. (NASDAQ:DMND) after its impressive third quarter earnings results as well.

Diamond Foods, Inc. (NASDAQ:DMND)

Third quarter results beat estimates

Diamond Foods, incorporated in 2005, is the owner of several packaged food brands including Emerald, Kettle Brand, Pop Secret and Diamond of California. Diamond Foods derived most of its revenue, $605.8 million, or 61.7% of the total revenue, from snacks, while the culinary and retail in-shell sales were nearly $293 million. The company’s two biggest customers were Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST), representing 18% and 12% of the total revenue in 2012, respectively.

In the third quarter of 2013, Diamond Foods, Inc. (NASDAQ:DMND) generated more than $184.9 million in revenue, lower than the revenue of $207.7 million in the same period last year. Diamond Foods managed to narrow down the loss, from $(44) million in the third quarter last year to $(15.6) million this year. The non-GAAP earnings per share was $0.05, handily beating Wall Street’s estimate loss of $(0.17) per share. Looking forward, Diamond Foods expected a further decline in revenue, driven primarily by the nuts business.

But high leverage and high valuation

What makes me worry about Diamond Foods, Inc. (NASDAQ:DMND) is its high leverage. As of April 2013, it had $309 million in equity, only $7 million in cash and around $575 million in both long and short-term debt. Furthermore, Diamond Foods booked a huge amount in its goodwill and intangibles, of $830 million. Consequently, Diamond Foods, Inc. (NASDAQ:DMND) has negative tangible equity of $(521) million. At $18.80 per share, Diamond Foods is worth nearly $418 million. The market values Diamond Foods, Inc. (NASDAQ:DMND) at as high as 20 times its EV/EBITDA.

EV/EBITDA stands for Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization. This ratio shows the relationship between the market value adjusted with cash and leverage position, and the cash flow position of the company. The lower the ratio, the cheaper the stock.

ConAgra Foods, Inc. (NYSE:CAG) is better with Ralcorp’s acquisition

Interestingly, Diamond Foods is valued the most expensively compared to its much bigger peers ConAgra Foods, Inc. (NYSE:CAG) and Mondelez International Inc (NASDAQ:MDLZ). ConAgra Foods, at $33.60 per share, is worth around $14 billion on the market. The market values ConAgra at a bit lower EV multiple, at 16.6. In the beginning of the year, ConAgra has completed the acquisition of Ralcorp, which it has pursued for several years.

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