We have downgraded our long-term recommendation on Diamond Foods, Inc. to ‘Underperform' following its dismal first-quarter fiscal 2013 performance. The stock also bears a Zacks #5 (Strong Sell) Rank, while its prime competitors ConAgra Foods, Inc. (CAG - Analyst Report) and Mondelez International, Inc. (MDLZ - Analyst Report) carry Zacks #2 (Buy) and Zacks #3 (Hold) Ranks, respectively.
Diamond Foods’ first-quarter fiscal 2013 adjusted earnings of 24 cents per share plummeted 66.2% from the year-ago quarter’s earnings of 71 cents, primarily due to weak top-line performance and increased operating expenses as a percentage of sales. Total sales for the reported quarter were $258.5 million, down 10.1% from $287.4 million recorded in the year-ago quarter, mainly due to sluggish performances delivered by the company’s both segments – Retail and Non-Retail.
Moreover, the company remained silent about any future sales and earnings outlook. However, it expects advertisement expenses to surge in the remaining period of fiscal 2013. The company’s performance may also get impacted due to difficulty on its part to secure walnut supplies and repair its ties with the growers. The company was charged for irregular payments to nut growers and accounting the same in other periods.
Further, the company has to look towards generating higher cash flow; otherwise, a highly leveraged balance sheet may stop it from taking strategic initiatives. Further, continued macroeconomic headwinds, intense competition, product recalls and fluctuations in raw material prices may undermine its future growth prospects and sustainability.
In addition, based on forward earnings estimates, Diamond Foods is trading at 60.54x, substantially at premium from the peer group average of 15.80x. The company has a TTM pre-tax margin of negative 9.5%, significantly lower the peer group average of positive 6.6%. Further, it generates a TTM net margin of negative 11.3%, well below the peer group average of positive 4.1%. The company’s TTM Return on Equity (ROE) of 0.2%, TTM Return on Investment (ROI) of 0.1% and TTM Return on Asset (ROA) of 0.0% are all worse than the peer group averages. Looking at the valuations, we believe that it would not be prudent to invest at the current juncture.