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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. (DMND - Analyst Report), 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.

Why Underperform?

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 million.

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. (FLO - Snapshot Report), General Mills, Inc. (GIS - Analyst Report) and ConAgra Foods, Inc. (CAG - Analyst Report). Flowers Foods has a Zacks #1 Rank (Strong Buy), while General Mills and ConAgra hold a Zacks Rank #2 (Buy).

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