Despite posting decent bottom-line result for the second
quarter of fiscal 2013, we have maintained our long-term
Underperform recommendation on
Diamond Foods, Inc
), with a target price of $15.00. Our bearish view on the
Stockton, CA-based specialty food company is based on its
dwindling future growth prospects.
Estimates for Diamond Foods have been declining ever since the
company revealed that sales for the second half of fiscal 2013
would decline at a faster rate than the fall registered in the
first half of the fiscal year. Diamond Foods' second-quarter
earnings of 5 cents managed to meet the Zacks Consensus Estimate
but its revenue of $220.8 million fell short by $20.2
Following the release of the second-quarter results, the Zacks
Consensus Estimate for fiscal 2013 fell 45.0% to 11 cents per
share. The Zacks Consensus Estimate for fiscal 2014 has also
declined significantly by 20.5% to 62 cents per share.
Cause for Concern
We believe that the hindrances faced to secure walnut supplies
and the difficulties in repairing its ties with growers are
affecting Diamond Foods' performance. Moreover, the company's
high dependence on a few retailers might prove unfavorable in
case there is a hitch in business negotiations.
Further, the company has to generate enough cash flow to
offset its highly leveraged balance sheet that might restrict its
strategic initiatives. Further, continued macroeconomic
headwinds, intense competition, product recalls and fluctuations
in raw material prices may weigh upon the company's results.
Given the fourth-quarter performance and the challenging
outlook, we fail to see any significant catalyst that could drive
the shares in the near term.
Specialty Food Stocks That Warrant a Look
While we prefer to avoid Diamond Foods until we see signs of
improvement in the company's performance. Other specialty food
stocks worth a look are
Flowers Foods, Inc.
General Mills, Inc
ConAgra Foods, Inc.
). Flowers Foods has a Zacks #1 Rank (Strong Buy), while General
Mills and ConAgra hold a Zacks Rank #2 (Buy).
CONAGRA FOODS (CAG): Free Stock Analysis
DIAMOND FOODS (DMND): Free Stock Analysis
FLOWERS FOODS (FLO): Free Stock Analysis
GENL MILLS (GIS): Free Stock Analysis Report
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