Diamond Foods Through the Eyes of Value Investors (DMND, PG)

Diamond Foods, Inc. (NASDAQ: DMND) is finally getting back to a decent value that investors might be more interested in.  This has been a rough week for the nut-making food and beverage company.

Last Friday this was a $67.57 stock.  Now shares are close to $51.00.  More importantly, this stock peaked above $96.00 as recently as September 21. 

Diamond is acquiring Pringles from Procter & Gamble (NYSE: PG), a deal which makes strange sense to some investors.  It turns out the deal was supposed to close in December but now it is being delayed over a walnut probe at Diamond over accounting of payments made to walnut growers.  It seems that a restatement for 2011 results is possible as a result.

The new time frame is mid-2012 for the $1.5 billion deal.  Diamond Foods has a current market cap of $1.13 billion and the belief by many is that the Pringles deal could effectively double or triple the size of the company as it was expected to help sales grow nearly 100% this year.  Now the estimates have to be backed in.

Our take is that any time there are accounting issues, we usually run the other way.  In this case it seems that much of the damage and then some should have been done.  Still, the market just does not reward investors for trying to be heroes right now.

After considering the situation, the global market scenario, and considering past accounting issues brought up in high-flying companies, we would only be comfortable tiptoeing into this one.  It sound cheap at 16-times forward earnings when you consider it was nearly 30-times just about six-weeks ago.  Still, we have to trust the “E” and any “accounting” questions and a deal delay suddenly challenge estimates.  There should be plenty of time to be patient over the coming weeks and months.

This may seem like a value stock now compared to when it was a high-flyer, but there is a reason for that.  Diamond Foods may currently be just a temporary value trap.

JON C. OGG