Diamond Foods (DMND): Nuts!

"If this market is making you go nuts, I have just the stock for you: Diamond Foods (NASDAQ: DMND), the premier processor and marketer of culinary, inshell, and snack nuts," says growth expert Tom Bishop.

In his BI Research, the advisor explains, "Diamond is a solidly growing, low PEG, fairly recession-resistant stock that should continue to be in style over the uncertain year ahead." Here's his review.

"The company, headquartered in Stockton, California, hs distribution in over 80% of U.S. supermarkets. The recent acquisition of Pop Secret now adds popcorn to the line-up.

"As the industry leader, the Diamond brand enjoys a market share in North American markets four times larger than the next largest competitor. Diamond is also the nation’s top exporter of walnuts to Europe and the Pacific Rim.

"The Diamond of California culinary nut label offers a full line of shelled and inshell nuts for cooking and baking, including walnuts, pine nuts, pecans, peanuts, macadamia nuts, hazelnuts, cashews, Brazil nuts and almonds.

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"The Emerald line, acquired in 2004, offers consumers healthier high energy snack options than potato or tortilla chips. Two recent offerings here, Cocoa Roast Almonds and Sea Salt and Pepper Cashews, are already among the top 10 fastest growing snack nuts in US grocery stores.

"By the end of fiscal 2008 Diamond expanded Emerald’s shelf presence by a whopping 28%. Sales were up 10% so some of the benefit from this still lies ahead. In 2009 the company plans to continue this effort and launch a line of 4 different 100 calorie almond-based snack packages.

"The snack segment grew from zero in 2003 to $89 million in fiscal 2008 and has now doubled with the addition of Pop Secret in mid-September of this year. Pop Secret, the #2 popcorn brand behind Orville Redenbacher in a billion dollar market.

"Also the company launched a new line called Breakfast-On-The-Go which has exceeded expectations of both the Company and its customers, so Diamond will be rolling that out more earnestly in 2009.

"In general the company is cutting back on lower margined sales and refocusing its business. This has slowed sales growth overall but has helped to improve gross margins from 15% in fiscal 2007 to 16.6% in 2008 with a target of 18-19% this year and 20% by 2011.

"This and other cost efficiency efforts have helped to improve operating margins to 4.5% with a goal of 10% by 2011.

"For fiscal 2008, EPS advanced a whopping 72% to $0.91 with analyst expectations of 40% growth in fiscal 2009 to $1.26, at this point, at the upper end of the $1.20 - $1.27 guidance range.

"However, this is at the lower end of the company’s own growth target of 40-50% compound average growth in EPS out to 2011. At the mid-point this works out to about $2.75 in EPS by then, and at the low end for 2010 would be $1.75 vs. the $1.58 initial analyst estimates.

"Note that Diamond has a record of beating analysts’ EPS estimates, with the last four quarters coming in 18%, 6%, 40% and most recently 23% ahead of estimates. So you could hitch you wagon to less worthy stars then this. With these well rated shares trading at 22 times FY7/09 earnings and growth in the 40% range, the PEG is hard to beat.

"Overall, the company has a product that customers probably wouldn’t cut back on regardless of economic conditions. In fact, in tough times, you might turn more to comfort foods like salty snacks.

"With all the economic uncertainty there is a discernable trend to eating more meals at home and this is having a favorable impact on Diamond’s sale of culinary nuts.

"In addition, Value Line ranks the stock 1 for timeliness and IBD rates the stock A+, neither of which hurts. Further boosting the case, 4 insiders recently bought shares and the stock turns up time after time at the top of our screens. "