Diamond Foods Is Out of the Rough

NEW YORK (TheStreet) -- Since reaching a near-term low of $20.85 last September, Diamond Foods (DMND) have been investors' best friend. Shares are up close to 50% over the past six months. Investors now want to know has this company fully emerged out of its rough patch.

Diamond, whose products include PopSecret popcorn, Kettle chips and Emerald snack nuts, had a tough 2013. In August the company had to pay $96 million in cash and stock to settle a securities lawsuit related to an accounting scandal. The company was alleged to have improperly accounted payments to walnut farmers. Later, the company reported a $36 million write-down from the Kettle-brand assets (and other items).

Complicating matters, this decision was made amid a period of weak walnut supply. It didn't make sense. At least that was the popular opinion. The argument was rivals including Mondelez (MDLZ) and ConAgra (CAG) were too far ahead, developing strategic growth initiatives while Diamond resorted to negotiating settlement terms with the Securities and Exchange Commission.

Today, Diamond -- although not flawless -- looks like a new company. Its shares are up over 18% for the year to date as of Friday's close of $30.60. Management has remained positive and has focused on implementing changes aimed at cleaning up Diamond's. This includes installing a new chief financial officer. These moves have begun to pay off.

Although not much was expected in the December quarter, Diamond showed it was cut above. Following Diamond's brutal September quarter, which missed earnings estimates, the company posted 1% revenue increase in its snack business. It was not a dominant performance. But it still beat the consensus estimate.

Management had offered a gloomier-than-expected outlook for the December quarter. This sent the shares tumbling 17%. So on a relative basis, the 1% growth in snacks should be considered a victory.

It seems management has taken control and is doing a much better job in shifting the company's product mix. It was encouraging the modest gain arrived even amid weak sales in Kettle U.S. The good news is  management doesn't expect this weakness to continue. Plus, both Pop Secret and Kettle U.K. continue to drive higher sales.

Still, investors want assurances that Diamond management can sustain this momentum. The industry is still dealing with weak volumes and compressed margins. Diamond is due to report fiscal second-quarter earnings on Tuesday.

The Street will be looking for 8 cents in earnings per share on revenue of $216.7 million. This would represent close to a 2% revenue decline year over year. It would also signify that Diamond's growth struggle is slowing. Don't forget, the company reported a 9% decline in the December quarter.

On the flip side, earnings is expected to be 60% year over year. Amid all of the restructuring, this is the key number in the equation and the true driver of the stock. Companies with questionable pasts have to demonstrate efficiency improvements. Investors want to know that their bet is rightfully place.

Management's job is to demonstrate it can get the company back on a path to long-term profitability and as quickly as possible. Along those lines, next quarter's guidance will be crucial. Any signs pointing lower will deflate the Street's confidence.

For now, Diamond should benefit from the fact that expectations aren't exceptionally high. Still, the stock's recent gains do suggest investors no longer perceive management as delusional. But with the stock near 52-week highs, investors should hope that they're not the nutty ones.

At the time of publication, the author was long AAPL but held no position in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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