Diamond Foods Reports Strong EPS Growth, Shares Hit Hard

Diamond Foods

reported Q4'10 EPS of $0.35 compared to BB&T's and the Street estimate of $0.28. Sales missed by $17M due to an overestimated contribution from Kettle and roughly $10M from the exit of low margin, non-retail business. Although $0.04 of the beat was due to lower taxes, $0.03 came from improved operating expense leverage. Management raised FY'11 EPS guidance by $0.03 to a range of $2.38-$2.48. This compares to prior-call consensus of $2.45. It also expects FY'11 revenues of $910M-$940M. Given management's history of setting conservative expectations, we believe earnings guidance could ultimately be exceeded. BB&T overestimated the seasonality impact of Kettle, however, adjusted for that, Q4 sales still would have translated into the company missing the mid-point of full-year internal sales guidance range, although this was due to the trimming of low margin, non-retail business during the quarter. BB&T is disappointed with Q4 sales levels, particularly given what is such an important metric for a growth stock such as DMND. DMND is trading down almost 10% at $38.44