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Analyst Blog

Recently, specialty retailer Diamond Foods, Inc. (DMND - Analyst Report) announced its financial results for the third quarter of 2011.

Street analysts had nearly a week to ponder on the news. In the subsequent paragraphs, we will cover the recent earnings announcement, analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Earnings Review

Diamond Foods third-quarter fiscal 2011 earnings of 52 cents per share grew a robust 73.3% from the prior-year earnings of 30 cents per share, primarily driven by strong top-line growth and improved margins. The third-quarter earnings also surpassed the Zacks Consensus Estimate by 4 cents.

Revenue for the reported quarter was $223 million, up 61% from $138.7 million recorded in the year-ago quarter. Strong performance in non-retail brands and the snack division resulted in an year-over-year increase. The top line beats the Zacks Consensus Estimate of $218.0 million.

(Read our full coverage on this earnings report: Diamond Shines, Profits Grow)

Agreement of Estimate

For the fourth quarter of fiscal 2011, out of 12 analysts covering the stock, 10 have revised their estimates downward, while none moved in the opposite direction in the last 7 days. For fiscal 2011, out of 12 analysts, 2 analysts have negatively revised their estimates while 4 moved upwards in the last 7 days.

Magnitude of Estimate Revisions

Taking into effect negative analyst revisions over the past one week, the Zacks Consensus Estimate for fourth quarter of fiscal 2011 has moved down by 4 cents (from 48 cents to 44 cents), while mixed revision tends for 2011 has led to an increase in the Consensus Estimate by 1 cent to $2.53.

Our Recommendation

Diamond Foods is focused on increasing market share by expanding its existing nut product lines and introducing new nut products in the United States and throughout the world. 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 the 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 explore 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 curtail supply and/or increase prices while 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. , currently holds a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock. Over the long term, we hold a Neutral recommendation on the stock.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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