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Diamond Foods Stock Play a Little Nutty

NEW YORK ( TheStreet) - As Diamond Foods (DMND - Get Report) tries to resolve a potentially crippling set of accounting, debt and regulatory issues, investors shouldn't try to nibble on the snack food-seller's shares until the company gets its financial house in order.

After reports Wednesday of a possible minority investment by private equity -- and a forbearance agreement with lenders like Bank of America (BAC - Get Report) -- stock investors won't have much chance to make a thoughtful investment in Diamond Foods, even if the company's food brands continue to show strong value.

Diamond Foods may have choked on Pringles

That's because a lender agreement to keep all debts from coming due immediately expires only a week after the company is expected to finally file earnings for the fiscal third and fourth quarters, giving investors little visibility into Diamond Foods true health.

On Wednesday, Diamond Foods said that through June 18 it's agreed to new terms with its lenders that will avoid making all of the company's loans due immediately. If those loans were to be called as a result of covenant breaches, the company could face a default and possible fire sale.

As part of the forbearance agreement, Diamond Foods will pay a higher interest rate on its credit line, suspend its dividend and work with a newly hired financial advisor Dean Bradley Osborne to raise capital and ensure its balance sheet meet covenants. Separately, the Wall Street Journal reported that private equity firms KKR (KKR) and TPG Capital were considering a possible minority investment in what's known as a "PIPE" deal.

Earlier in March, Diamond Foods said it had received an extension to file its earnings results for the quarters ended on Oct. 31 and Jan. 31 by June 11. The company also said it received a "non-compliance" notice from the Nasdaq, but will continue to be listed and traded as it works to file earnings.

That news is good for Diamond Foods, even if stock investors don't cheer because it gives three months time for the company to repair its finances, as it resolves accounting issues and a Securities and Exchange Commission investigation.

"It would certainly seem in the lenders' best interest to provide Diamond Foods ample cushion to continue operating as a going concern while it assesses its longer-term alternatives," wrote Janney Capital Markets analyst Mitchell Pinheiro in a note assessing the forbearance. "We found the report to be somewhat surprising, as the thought of further dilution seems unnecessary on the surface. Perhaps this is nothing more than public posturing signaling to potential strategic buyers that the board has other options and there will be no asset fire sale." Pinheiro cut his Diamond Foods price target to $23 from $25 and rates shares "neutral."

Diamond Foods continues to garner a near $40 a share price target, according to consensus analyst estimates polled by Bloomberg, as many focus on the sum of the company's parts. Pinheiro calculated that the San Francisco-based maker of Kettle Brand potato chips, Emerald Nuts and Pop Secret popcorn could be worth $31 a share in a breakup. D.A. Davidson & Co. analyst Timothy Ramey reiterated his $44 a share price target and "buy" rating in a Mar. 13 note highlighting sales growth. He estimated that its Kettle potato chips division could be worth up to $900 million in a sale.

But equity investors are taking a different stance. After February audit committee findings confirmed accountancy issues, stock investors slammed Diamond Foods, causing a near 40% Feb. 8 stock drop. After Wednesday's optimistic news, Diamond Foods shares fell over 7% to $23.76 in afternoon trading.

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The problem for investors is that Diamond Foods still needs to file earnings after an audit committee found that the company didn't properly account for Emerald Nuts walnuts supplier payments. Since those filings are expected just a week before lender forbearance expires, it gives public investors little time to weigh the company's financial results against its precarious situation. Meanwhile, the prospect of a dilutive private equity investment or a lender-initiated firesale remain.

How bad could the restatements be? The lender forbearance will stand so long as Diamond Foods net loss for the quarter ended on April 30 doesn't exceed $13 million, including accounting adjustments, according to a March 21 filing with the SEC. The agreement allows for up to $4.3 million in write-offs and $5 million in other expense, according to the filing.

Diamond Foods, KKR and TPG Capital declined to comment for this story.

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