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Here's Why Investors Should Bet on Diamond Foods for the Long Run

June 19, 2014 | About:
rusticnomad

rusticnomad

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Diamond Foods (DMND) is going through a nightmare in 2014 as it suffers from a torrid past. In 2011, there was an accounting scandal at Diamond Foods, resulting in losing the acquisition of Pringles to Kellogg. Pringles formerly belonged to Procter & Gamble, and its addition to Diamond's fleet could have helped it increase its product line up. But with that opportunity gone, and along with tough competition from peers such as ConAgra, Diamond Foods is having a tough time.

But management has not lost hope, and is still optimistic about its prospects. It agreed to pay $5 million to settle SEC charges for cooking the books and it can now focus on growing the business. This news received a favorable response from the market. But the biggest question on investors' mind is whether it will continue with this momentum or not.

The road ahead

Management is working hard to recover from the after effects of that scandal. During the first quarter of 2014, the company managed to continue at the same pace as before. The company undertook a combination of strategies, which include net price realization, cost reductions, and productivity improvements. As a result of this, its gross margins expanded 24.7% to 200 basis points.

However, its net sales for the quarter declined 17.1% from the year ago period, mainly on account of a shortfall in supply. But it was partly offset by a 1.2% increase in its snacks business on a year over year basis. Consequently, its net revenue declined 9.2% to $234.7 million as compared to last year. Also, its diluted earnings per share were $0.18 as compared to $0.24 a share last year.

Strategies to drive growth

In order to further prevent these declining numbers, Diamond has adopted a cost cutting strategy. Under this, the company plans to save around $35 million to $40 million in fiscal 2013 and 2014, which will be primarily from procurement and manufacturing productivity. Consequently, management expects that this will generate an earnings growth on a year over year basis in fiscal 2014.

Moving forward, it aims to generate top line growth from fiscal 2015 onwards. According to data provided by Bloomberg, Diamond Foods has cut the rate on a $415 million loan it’s seeking to refinance debt. This will further help the company to increase its earnings in the days ahead.

Competition

But, Diamond has to face tough competition from Kellogg. Kellogg is currently experiencing weakness in its cereal business in the developed markets, as customers are moving to a healthier lifestyle such as natural and organic food items. Consequently, its revenue for the quarter declined 1.7% from a year ago period.

However, Kellogg is determined to win back its customers, and as a result it has introduced innovative products that would be according to the requirement of its consumers. It has introduced a series of new products such as new Special K Chocolate Almond, the Krave cereal, Touch of Fruit Mini-Wheats, Bear Naked granola, and new Kashi cereals. It also includes three varieties of Organic Promise, all of which are GMO-free.

Moreover, Kellogg is also focusing to decrease its cost structure through a $1.2 billion-$1.4 billion 'Project K' restructuring program. Management expects that this will help the company save around $425 million-$475 million by 2018. This will further boost its growth in the next four years.

Conclusion

Diamond Foods, however, has put in a lot of effort and its hard work is starting to pay off as the market has duly rewarded its efforts. It still continues with its growth strategies and as the company leaves behind the SEC charges settlement case, investors can expect it to rally. Investors who currently own the stock should probably hold it further as it can yield handsome returns in the future.


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