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On Jun 27, we upgraded leading specialty food company, Diamond Foods, Inc. (DMND - Analyst Report) to Neutral from Underperform. This was based on the company's strong bottom-line results for third-quarter fiscal 2013 and its improved prospects. Our new investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Upgrade?

We believe that the vertically integrated business model allows Diamond Foods to effectively adapt to market trends and exploit new opportunities. Moreover, the company’s nut roasting facilities and patented glazing technologies provide a self-stable glazed nut for the mass market.

Diamond Foods is swiftly progressing with its planned cost containment and operational initiatives. We consider that the company’s turnaround strategies – such as improving price realization, lowering underperforming SKUs and reducing dependency on discounting – have started bearing results, as evident from improved margins and earnings per share in third-quarter fiscal 2013. Moreover, Diamond Foods expects future results to depict more sustained growth of its brands, arising from product innovation and differentiation, improved cost structure and rebuilding of healthy relationships with walnut suppliers.

Further, Diamond Foods is focusing on gaining its lost market share by expanding the existing product lines and introducing new products in the United States. Management’s strategic plan rests on providing higher-margin branded products at premium price points. The branding strategy includes a marketing program that is designed to build consumer awareness and customer loyalty through targeted TV advertising, unique packaging and in-store merchandising.

However, near-term headwinds remain, with fourth-quarter sales projected to fall at a faster rate than the previous quarter. Further, we believe that the challenges related to procuring walnut supplies and mending Diamond Food’s ties with growers are denting the company’s performance. Moreover, the company’s high dependence on few retailers might prove unfavorable in case there is a hitch in business negotiations.

Other Stocks to Consider

Till any further upgrade in Diamond Foods’ Zacks Rank, better performing stocks in the food industry include Flowers foods, Inc. (FLO - Snapshot Report), Omega Protein Corp. and B&G Foods Inc. (BGS - Snapshot Report) – all of which carry a Zacks Rank #1 (Strong Buy).

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