Diamond Foods Shapes Up, Looks Ready to Dish Out Growth and Value

NEW YORK (TheStreet) -- Shares of Diamond Foods (DMND) have been on an incredible run, soaring more than 55% since reaching a low of $20.85 last September.

Shares closed Tuesday at $32.63, up 2%, but more gains are likely in store.

Things haven't always been easy. Diamond has had a rough time with internal controls, including being forced last August to pay $96 million in cash and stock to settle a securities lawsuit related to an accounting scandal. Then there was a $36 million writedown, which was due to its Kettle brand assets.

All told, Diamond, whose products include PopSecret popcorn, Kettle chips and Emerald snack nuts, wasn't always investors' best friend. Today the story has changed.

Even though the packaged food industry is still struggling with weak volumes and compressed margins, Diamond management has used a strong product mix to post modest gains in the U.S. and solid results in areas nations such as the U.K.

With signs of improvement seen within the sector, these shares can still be a delight. Investors would be wise to take a nibble here ahead of Diamond's fiscal third-quarter results, which are due out Thursday.

Observers are looking for 17 cents in earnings per share on revenue of $191.72 million, which would represent a year-over-year revenue increase of 3.7%. Earnings, meanwhile, are projected to grow 240% year over year.

Granted, that's an anomaly and reflects the depths from which Diamond has emerged with last year's poor results. But the company has nonetheless shown solid margin expansion, particularly in the second quarter when gross margins expanded 2.5 points year-over-year to 25.4%.

It's been more than the just efficiency improvements, however. To turn things around, management has also focused on innovative brand strategies and distribution. The company plans to launch new flavors of its ready-to-eat popcorn and a variety of Kettle-branded real-sliced potato chips.

Diamond has always prided itself on its product portfolio. But these new launches, which will raise Diamond's profile in the snack food categories, may serve as catalysts to propel the stock upward in the second half of the year. Plus with ongoing supply chain efficiencies and cost savings measures, this company has just begun to realize its full potential.

There's always the risk that snack giants such as Mondelez (MDLZ) and Pepsico (PEP), which has strong snack brands like Frito Lay, may take away some of Diamond's momentum with increase pricing pressure. But management has shown that it can withstand much bigger adversities.

In the meantime, investors have to be encouraged that the doom-and-gloom period is finally over. With expectations still relatively low, Diamond should have an easier time meeting or beating this quarter's results. The direction the stock takes, however, will be based on guidance.

After strong gains in Diamond's shares, there's limited upside potential, but $35 is still attainable. It's not a robust premium, but it's enough to whet the appetite.

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


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

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