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Some Nutty Growth in a Nutty Economy
By Michael Brush
Exclusively for InvestorIdeas.com
April 03, 2008
A great benefit of tracking insiders closely is that they regularly lead you to obscure corners of the economy where few sane people would ever consider searching for growth.
Case in point: You’d almost have to be nuts to expect a 100-year-old nut company to give you potentially market-beating returns. After a century in the business, shouldn’t it have all the angles down by now? Shouldn’t it be a mature company?
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When it comes to Diamond Foods (DMND), insiders don’t think so. While you can’t really say they are going nuts for the stock, they’ve bought a meaningful amount. The chief executive and finance chief purchased about $330,000 worth last week – which is significant at a micro-cap company with a market cap of just $303 million.
In a nutshell, here’s what they’re buying into. The company is projecting up to 80% earnings growth for the current year (ending in July), or earnings per share of 80 cent to 90 cents, compared to 53 cents last year. Analysts are forecasting 88 cents a share in earnings this year, according to Reuters. They think that will double to $1.68 by 2010, thanks to a combination of new snack products, new sales channels like convenience stores, and cost cutting.
Insiders bought at around $18.50 a share, or just below recent prices. The stock is off a near all-time high of $22.67 printed last November. Diamond trades for a forward price earnings ratio of about 15.8, but it’s actually cheaper than that if you take out $3.60 a share in cash. Longbow Research analyst Alton Stump has a $26 price target on the stock.
Product lines
Before we get into the details of the growth plan, here’s a quick summary of what Diamond sells. The company has four product lines:
- Diamond’s chief line is “culinary nuts” – or nuts used in cooking. It sells them through grocery stores under the Diamond of California brand. This was the company’s biggest product line last year, representing 41% of its $522 million in sales. Culinary sales increased 17% during the most recent quarter, mainly because of the company’s pricing power.
- Next, the company sells nuts used by food processors, restaurants, bakeries and food-service companies. This is the next largest product line, at 27% of sales.
- Diamond also sells snacks under its Emerald and Emerald Harmony brands, including glazed and flavored nuts, seeds, dried fruit and trail mixes. This is where it expects the most growth.
- Finally, it sells nuts still in the shell under the Diamond of California brand, chiefly during the winter holiday season.
If you have ever been to Wal-Mart (WMT) or a Costco (COST) store, you’ve probably seen Diamond products. Diamond registers about 21% of its sales with Wal-Mart and 14% with Costco Wholesale. But it sells through over 60,000 retail outlets in over 100 countries.
The game plan
As I see it, based on a review of company filings and the most recent conference call, insiders are betting on a combination of strong growth in its snack lines, and cost cutting.
For example, the company hopes to grow its snack foods business to $200 million or more in sales per year by 2011, from $80 million last year. Here, the company will be working the Harmony Foods brand it purchased in 2006, which offers products like trail mixes, specialty dried fruits, nuts, seeds, and salty snacks.
This looks like how they plan to make it happen:
- New channels. Near the top of the list here are convenience stores, where sales are growing faster than at traditional grocery stores. But the company is also rolling out snack products through retailers like Home Depot (HD) and Blockbuster (BBI). And it wants to get more snacks into more mass merchandise outlets and clubs, where it already has a strong presence selling “culinary nuts” used in cooking.
- Fresh products. It’s rolling out new products like chipotle nuts and wasabi oven roaster peanuts, as well as sea salt and pepper cashews, and coco roast almonds. Expect more to come.
- Marketing. The company is backing away from expensive extravaganzas like Super Bowl ads, and trying to bring in a younger customers through co-branding arrangements with brands and companies like Heineken, Hershey (HSY), McDonald’s (MCD), Coca-Cola (KO), and General Mills (GIS).
- Cost cutting. Diamond is revamping much of its production, and taking other steps to cut costs. You can tell it has been successful because it posted stronger earnings in recent quarters, despite higher commodity costs.
The bottom line: A lot of this is fairly basic block and tackle business development -- like cutting costs and working existing sales channels to roll out other, higher-margin lines like snack products. So while it seems far fetched to expect market-beating returns from a basic company like this, it many not really be so nutty after all.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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