NEW YORK (TheStreet) -- Specialty snack food company Diamond Foods (DMND) recently reported fiscal third-quarter fiscal 2015 earnings that sent its stock skyrocketing more than 7%. But don't go nuts about it.
The Stockton, Calif.-based company reported a profit of $6.3 million, reversing last year's loss. Its adjusted earnings of 23 cents per share were good enough for an 8-cent beat. Revenue, on the other hand, was down 2.5% year over year to $186.1 million, against sales of $191 million in the year-ago quarter.
That didn't matter to investors, who applauded the results including Diamond boosting its full-year outlook, calling for earnings per share to be in a range of $1.00 to $1.10 per share versus prior guidance of 95 cents to $1.10.
Diamond Foods stock recently traded close to $32, up nearly 4%, up 13% for the year to date. By contrast the Standard & Poor's 500 is up 2.3% for the period.
Known for its Kettle chips, Emerald snack nuts and PopSecret popcorn, Diamond has turned around its fortunes after overcoming an investigation by the Securities and Exchange Commission.
While it's encouraging that margins have begun to expand, this also marks the third consecutive quarter Diamond has missed Wall Street's revenue projections and the fourth time in five quarters revenue has fallen short of expectations.
Despite improving margins and its cost-cutting initiatives, Diamond must compete against snack food giants Mondelez (MDLZ) and Pepsico (PEP). Diamond lacks the sales momentum needed to drive long-term profits. Cost cutting can't work indefinitely --at some point Diamond will have to reinvest in growth. Competition, which includes various sales and marketing expenses, comes at a price.
Diamond stock, based on last year's earnings of 64 cents per share, trades at a price-to-earnings ratio of 46, factoring in its current share price of around $30. This means Diamond stock is valued at three times the average company in the S&P 500, which trades at a P/E of 21. While fiscal 2017 full-year earnings projections of $1.27 per share calls for 18% year-over-year growth, Diamond stock is still valued at 24 times forward estimates, against a 17 P/E for the S&P 500.
Also, fiscal-year 2017 revenue is projected to grow at only 3% year over year, or five times slower than earnings. This implies extraordinary margin performance. That's just too much risk to take on, especially with multinational companies like Diamond still struggling with negative currency impacts of the strong U.S. dollar.
That's a lot of risk for a company that doesn't even pay you a dividend.