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Diamond's Still in the Rough

NEW YORK ( TheStreet) -- While it's common for companies to get a second chance on Wall Street, it's nuts to make a play for snacks company Diamond Foods (DMND), whose stock is getting roasted, falling more than 11% this week after the company posted a net loss for its fiscal fourth quarter and gave a disappointing outlook for its fiscal first quarter.

On a relative basis, though, I don't believe that Diamond's outlook swayed drastically from what has been projected by other packaged-food companies such as McCormick (MKC) and ConAgra (CAG). But unlike its peers, Diamond has a poor history of execution and has been marred by an accounting scandal.

The company -- whose products include PopSecret popcorn, Kettle chips and Emerald snack nuts - expects a tough first quarter due to the relaunch of its nuts business after it allegedly didn't account for payments to walnut farmers properly.

In August, the company paid $96 million to settle a securities lawsuit related to the accounting scandal. Diamond is relaunching its Emerald nuts brand even as the market has been weakened by a lower supply of walnuts. And given its $36 million write-down in the fourth quarter from its Kettle-brand assets and other items, Diamond already has its hands full.

The timing of the nuts relaunch is also puzzling since the company's nut sales fell 25% in its fourth quarter.

It's not all bad, however. The company surpassed analyst estimates with a profit of 9 cents a share on an adjusted basis. Revenue fell 11%, but met management's estimate.

I understand the appeal of a beaten-down stock of a company that just beat estimates. But this is a murky situation. Although hiring Raymond Silcock -- who has a long and impeccable track record in the food and beverage industry -- as chief financial officer will help mitigate worries about financial shenanigans, Diamond has little pricing power in a competitive industry.

Diamond bulls will say that gross margin rose to 26.6% from 18.9% in the fourth quarter. The company, however, accomplished that by extensive cost-cutting, while offering fewer sales promotions. How long can that last, given that the company competes with heavyweights ConAgra and PepsiCo (PEP) as well as Mondelez (MDLZ) and Lance (LNCE)?

Management is optimistic about the company's turnaround progress and is working hard to distance itself from its brutal past. But until revenue and cash flow improve, I don't see why anyone would dare to nimble on this stock.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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