Diamond Foods Is a Gem

Diamond Foods (DMND - commentary - Cramer's Take) announced earnings yesterday that beat analysts' fiscal first-quarter 2009 projections. It was only by a few cents, but that means a lot in this market. The company reported earnings of 64 cents a share (67 cents excluding non-recurring items), while the Street was looking for 62 cents a share. Diamond's commanding presence in the nut market can be levered to for cross-sell and distribution purposes to sustain long-term growth.

Diamond Foods was created in 2005 when Diamond Walnut Growers and Diamond Foods merged and completed an IPO. The company is the largest seller of culinary nuts in the U.S. and sells to more than 850 wholesale customers in more than 100 countries; its Diamond of California brand is a market leader. Diamond also has a portfolio of snack products under the Emerald Brand that includes nuts, seeds, trail mixes and dried fruits. The Pop Secret microwave popcorn brand was acquired this fall from General Mills (GIS - commentary - Cramer's Take).

Diamond has been adding new products, increasing brand market share and creating new operating efficiencies. After the 2005 IPO, the company accelerated a push to lower unit costs with plant upgrades and changes in distribution facilities. Several new snack products were added in 2008, including Pop Secret. The company has aggressive and sophisticated marketing programs and has changed the sales mix to higher-margin products. Results have been good: Diamond has grown retail sales more than 20% on an annual compound basis over the last five years.

Diamond is a play on several long-term trends. First, nuts are seen as a healthy source of protein with strong consumption patterns and growing acceptance as a snack in the marketplace. Also, supermarket and produce retailers are consolidating into a smaller number of large players in the market. These organizations want to work with large suppliers with more efficient organizations. This benefits providers with scale and premium brands such as Diamond. The more Diamond promotes its premium brands, the more its customers like selling the product, which leads to more shelf space.

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At the time of publication, Gear had no positions in the stocks mentioned.

Steve Gear was director of capital markets at Stockhouse.