NEW YORK (TheStreet) –- Specialty snack food company Diamond Foods (DMND) will report fiscal first-quarter financial results Monday after market close, and the company's shareholders are getting nervous.
Diamond, whose products include PopSecret popcorn, Kettle chips and Emerald snack nuts, is still operating in a weak packaged food environment, where companies like Hershey (HSY) , General Mills (GIS) and Kellogg (K) have struggled to grow sales.
Not wanting to take any chances of a poor result and worse, downbeat guidance, Diamond investors have begun to sell some of their shares, sending the stock down 2.6% over the past month. By contrast, the Dow Jones Industrial Average (DJI) and S&P 500 (SPY) have posted gains of 2.3% and 2.17%, respectively, during that span.
Being cautious, as investors have shown, is indeed the best play here. This is because it's tough to know what Diamond Foods you're likely to get.
The chart below, courtesy of Google Finance, shows how quickly and easily Wall Street can change its mind.
While Diamond might not have been as great as its 45% jump in February (from $24.09 to $34.93) would suggest, the company was also not as bad as its 25% decline from March to June may indicate. What you are left with is something in the middle. And given that the food sector has shown little to no signs of life, being in the middle is not good enough. Not to mention, these shares, despite the recent declines, are not as cheap as they look.
While Diamond still has a high analyst 12-month price target of $36, according to CNN Money, the stock is trading at more than 28 times fiscal 2015 earnings estimates of $1.03. That's more than 11 points higher than the average forward price-to-earnings of companies in the S&P 500, according to The Wall Street Journal.
And when you consider the company ended fiscal year 2014 with negative $102.3 million in operating cash flow, according to CNN Money, it's tough to place a bet here. Not to mention, Diamond's net debt position of $653 million no longer makes it the takeout candidate investors have been hoping for.
The good news is, Diamond has begun to make efficiency improvements to make the company more profitable, which led to 3.3% gain in overall adjusted operating income when the company announced fourth quarter and full-year results in September. Plus, in September, the company guided full-year 2015 adjusted earnings per share to be in the range of 90 cents to $1.10 per share, a strong increase from the 64 cents per share earned in fiscal year 2014.
CEO Brian Driscoll also highlighted the company's focus on innovative brand strategies and distribution. In the next couple of quarters, the company plans to launch new flavors of its ready-to-eat popcorn and a variety of Kettle-branded real-sliced potato chips.
It remains to be seen to what extent these new products will raise Diamond's profile in the snack food categories. Rivals like Mondelez (MDLZ) and Pepsico (PEP) , which has strong snack brands like Frito Lay, are ramping up their own products and marketing efforts to help grow their market share.
And on a macro level, packaged food companies have yet to see the positive impact from slumping oil prices. Although consumers are saving more at the pump this has not translated tomore grocery sales. And any positive effect may not be known for several more quarters.
To that end, with Diamond still facing operational and competitive headwinds, investors should lock in their gains now and wait for clearer signs that the company has turned the corner.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
TheStreet Ratings team rates DIAMOND FOODS INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate DIAMOND FOODS INC (DMND) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance and impressive record of earnings per share growth. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk, poor profit margins and weak operating cash flow."
You can view the full analysis from the report here: DMND Ratings Report