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.
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.
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.