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Diamond Foods, Inc. (DMND) Message Board

  • paths_ca paths_ca Dec 4, 2011 7:21 PM Flag

    What is the fundamental value??

    Maybe that will help in dealing with all this volatility. How much of
    the value per share can be attributed to walnuts?

    It sounds like they should have included the momentum payment as a
    2011 cost. Now that this has become such an issue, it will have to be
    evaluated and most probably corrected and restated into this years
    accounting. Since walnut prices are remaining high they will likely
    have to essentially abandon their contracts and start paying a fair
    market price to all growers starting next year, to maintain their
    goodwill and standing with these suppliers. Then building this change
    into their operating cost going forward. No fraud, but an unfortunate
    mistake they are in the process of dealing with. At least that is my
    what I figure so far. I do not believe there is anything more serious
    lurking behind the scenes, however, this one issue that I do believe
    is not a trivial concern. The pringles purchase should go ahead since
    it can still be managed after the revenue from the walnuts are
    considered as reduced by some amount going forward.

    So the walnut business was generating extra profit than it should
    have been receiving, and therefore must have been overvalued by
    investors?? So if we say ok, take the value of the walnut business,
    and reduce it by say one third, or maybe a little more to account for
    negative sentiment, add in the value of the other parts of the
    business and assets. Then what should the share price be? The share
    price is down so much that this influence although a negative must be
    far more than baked in by now, and then some, I think.

    I'll be working on it this evening, but if people have comments that
    will help.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • I don't understand why they would abandon the contracts. Contracts are made to insure supply and price for the buyer and lock in a profit (hopefully) for the grower. You sound like they owe the growers a "do over", makes the growers appear to victims and or idiots. Never contract all your production unless you are very comfortable with the terms.

      • 1 Reply to carchandco51
      • The difficulty with the contracts began during 2010 when walnut
        prices surged higher by about 25% and remained higher than what the
        company or the growers considered might happen. So yes the growers are
        locked into contracts, however, they see that they are missing out on
        substantial profits seen by growers without a contract. If something
        is not done to respond to their concerns, they have the option of not
        remaining as suppliers to Diamond when their contracts do expire. So
        after considering the way things work in the real world, Diamond has
        already made one additional payment of 50 million that was not
        required under the contract. When growers received the payment it was
        not documented as to which crop year it was applied to, and somehow it
        led to the turmoil we see now.

        When I make estimates about this effect, the shares look significantly
        undervalued. The worst case scenario that I can imagine, would be for
        the company to give in completely and move the 50 million into 2011,
        and then promise the growers that they will make this 50 million
        extra payment each and every year from now on. I am not saying I
        expect that to happen, but assuming a worst case just to make the
        calculation easier. That would increase their operating cost by 50
        million, but after completion of the Pringles transaction, the earnings
        would still be expected to be about 2.1 per share. The current share
        price in my view is pricing in the worst case outcome to this
        situation.

        I wrote more about this and submitted it to seeking alpha, but they
        are asking for some revisions. They may have it out later, or else
        I'll post more about it here.

    • Shorts have piled in assuming a big fraud. The most likely outcome is earnings restatement which can be interpreted either way. The good thing so far is that P&G is not walking away. The most interesting part of the P&G deal, in my opinion, is that DMND may be buying Pringle but P&G will be holding a big chunk of DMND shares. That may put them in a controlling position.

 
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