Earnings Preview: Diamond Foods

Diamond Foods, Inc. ( ( DMND - Analyst Report ) ) is scheduled to release its third-quarter 2011 results on Thursday, June 2, 2011. The Zacks Consensus Estimate for the quarter is pegged at 48 cents a share, representing an estimated year-over-year growth of 60%.

Second Quarter Performance

Diamond Foods’ second-quarter fiscal 2011 earnings grew a robust 89.6% to 91 cents per share from 48 cents per share in the prior-year quarter, primarily driven by strong top-line growth and improved margins. The second-quarter earnings also surpassed the Zacks Consensus Estimate by 2 cents.

Revenue for the reported quarter was $257.6 million, up 39.9% from $184.2 million recorded in the year-ago quarter. Better-than-expected performance of retail brands and the acquisition of Kettle primarily resulted in the annual growth. However, the top line fell short of the Zacks Consensus Estimate of $265.0 million.

Agreement of Analysts

Over the past 30 days, none of the brokers moved their estimates in either direction leaving the consensus unchanged for the second quarter as well as the fiscal year 2011.

Magnitude of Estimate Revisions

Given a complete lack of movement in earnings revisions by analysts in the last 30 days, the Zacks Consensus Estimates for the third quarter and fiscal 2011 have remained static at 48 cents and $2.52 a share, respectively.

Surprise History

With respect to earnings surprises, Diamond Foods showed a favorable trend in the last four quarters. The company has recorded positive surprises in the trailing four quarters with a low of 2.3% and a high of 50.0%. On an average, the earnings surprise was a positive 20.5%. Based on the current flow, we expect the company to come up with healthy results in the upcoming quarter.

Our Recommendation

Diamond Foods is focused on increasing market share by expanding the existing nut product lines and introducing new nut products in the United States and worldwide. Management’s strategic plan is based on providing higher-margined branded nut 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. Further, management has outlined three main priorities: to build the distribution network; expand retail channels, especially in the club and mass merchandiser areas; and increase sales velocity within existing channels.

Diamond Foods is vertically integrated and has advanced processing capabilities. The company's activities range from direct sourcing and shelling of nuts to processing and packaging of nut products. The vertically integrated business model allows Diamond Foods to quickly react to market trends and exploit new opportunities. Besides, the company’s nut roasting facilities and patented glazing technologies provide a shelf stable glazed nut for the mass market.

However, nuts, the primary raw materials of Diamond Foods, are subject to fluctuations in availability and price. Though the company has long-term supply contracts with walnut growers, crop size, quality, and yield fluctuations could cause supply shortages and/or price increases affecting the company’s profitability.

Diamond Foods, which faces intense competition from Kraft Foods Inc. ( ) , Blue Diamond Growers, Sunkist, and John B Sanfilippo & Son Inc. ( JBSS ) , currently holds a Zacks #2 Rank, implying a short-term 'Buy' rating on the stock. Over the long term, we hold a Neutral recommendation on the stock.