Diamond Foods Continues to Rise: Do You Hold Positions?

Snacks maker, Diamond Foods Inc. DMND has been gaining momentum, with shares rising nearly 43% year over year. We note that the smooth execution of turnaround strategies, such as improving price realization, lowering underperforming SKUs and reducing dependency on discounts have been growth drivers for the stock.

Diamond Foods is progressing well with its planned cost containment endeavors and operational initiatives. The company's progress with regard to its growth initiatives is evident from the robust gross margin expansion in first-quarter fiscal 2016. Gross margin expanded 300 basis points in the quarter.

Though earnings in first-quarter fiscal 2016 remained flat with the year-ago quarter, the bottom line gained from margin expansion, along with continued strength of Kettle U.S., signs of recovery in the U.K. and the Emerald transition being on track. We expect the company's brands to exhibit further sustained growth in the future, driven by product innovation and differentiation, an improved cost structure and revived relationship with walnut suppliers.

However, the company's performance in the aforementioned quarter was soft as both earnings and sales fell short of expectations. The top line was impacted by the exit of certain high volume, low margin nut SKUs, coupled with lower net price realization in international walnut sales, and negative foreign currency impact.

Though management retained its outlook for fiscal 2016, it expects these currency woes to persist and weigh on the company's overall performance going forward, thereby raising concerns.

Apart from this, Diamond Foods has a highly leveraged balance sheet, as evident from the fact that at the end of first-quarter fiscal 2016, its long-term debts were almost double the stockholders' equity. This has been hurting the company's bottom line due to high interest expenses. If Diamond Foods fails to generate higher cash flow, it might not be able to undertake strategic initiatives.

Zacks Rank

Diamond Foods currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Campbell Soup Company CPB, with a Zacks Rank #1 (Strong Buy), ConAgra Foods Inc. CAG and Omega Protein Corporation OME, both carrying a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>