Diamond Foods, Inc. (DMND), PepsiCo, Inc. (PEP): Snack Food Business Poised for Higher Profitability

Turnarounds are one of the most difficult situations to consistently make profitable investments in because the outcome is always uncertain. However, investors who can successfully bet on a turnaround prior to the market realizing the company’s progress can make a boatload of money.

One potential turnaround that has received significant scrutiny from investors is that of Diamond Foods, Inc. (NASDAQ:DMND). Diamond’s stock plummeted after its Q2 earnings report showed lower revenue than what Wall Street analysts were expecting. However, the company has made significant improvements that may offset the disappointing revenue figure.

Overcoming Adversity

Diamond Foods was in the news not too long ago due to an accounting scandal involving payments to walnut producers. The company has been struggling to keep up with demand in the walnut market so it is not all that surprising that an accounting irregularity came from this segment.

The company also announced more bad news when it told investors that it had lost a bid to buy Pringles. The failed acquisition cost the company over $100 million.

But with the accounting scandal behind it and the Pringles charge-offs baked in, the company can resume its focus on turning the company around.

Despite the revenue miss, Diamond Foods, Inc. (NASDAQ:DMND) continues to improve its gross margin and free cash flow. The company has achieved these improvements by dropping low-performing products from its offering in addition to cutting back on discounting. The decline in revenue should level off as the company’s strongest brands start showing proof of pricing power.

Keys to Success

In a recent investor presentation, management laid out its four-pronged plan for turning the company around.

(1) Rebuild Walnut Supply

Demand for walnuts has grown rapidly over the last few years, but Diamond Foods, Inc. (NASDAQ:DMND) has struggled to supply the market with adequate quantities. As a result, management is re-working grower incentives and investing more heavily in its walnut brands in order to take advantage of the skyrocketing price of walnuts.

(2) Re-Position Emerald Brand

Management has traditionally tried focused on maximizing sales growth of the Emerald brand, but it is now determined to grow the brand at a slower and more profitable rate. Many of the underperforming products being eliminated are in the Emerald brand.

(3) Re-Invest in Brands

Diamond believes that introducing new products to the market is the best way to grow its brands.

(4) Optimize Cost Structure

The company is streamlining operations and adding capacity to its existing plants. Management expects savings of $20 million to $40 million from these efforts.