Shares of Diamond Foods (DMND) recently tested a low of $27.07, which is a level that has served as longer-term support. DMND is still below its 100- and 200-day major moving averages, with near-term resistance sitting at $28.50-$29. A close above these levels should get $30 in play, so I recommend entering a bullish position now ahead of that move.
Buy the DMND June 31 calls (DMND150619C00031000) at current levels around $0.55.
I have an exit target for the calls of around $0.90-$1.35, but I do not have a stop loss in place at this time.
The company is scheduled to announce its quarterly earnings during the first week of June, so this headline risk is still a few weeks away. I would like to see shares above $30 going into the announcement, which is where I would like to close the first half of the trade. This is why I have listed two Exit Targets of $0.90 and $1.35.
Analysts are expecting Diamond Foods to earn $0.15 a share on revenue north of $195 million. In early March, the company matched Wall Street’s estimates for a profit of $0.25 a share but missed on its revenue number by nearly $7 million ($229.7 million versus $236.5 million).
Shares made a nice run from $30 to $33.72 following the earnings news and into April, but it has been a rocky ride since. Shares closed lower in 18 of 20 subsequent sessions, and the pullback has been a little harsh.
It is important to note that the company raised its 2015 earnings range from $0.90-$1.10 to $0.95-$1.10 a share in March. This gives Wall Street a mid-point range of $1.025 a share, and analyst estimates are at $1.03 for 2015.
Earlier this month, BB&T recently said the weakness in the stock was a buying opportunity, as it reiterated its $33 price target and “Buy” rating. In February, BMO Capital upgraded the stock to “Outperform” from “Market Perform” and slapped a $32 price target on the stock.
I also like Diamond Foods as a speculative takeover target, as the company has a great, healthy snack portfolio. Diamond has been on the acquisition trail as well, following its 51% acquisition stake in Yellow Chips. The Netherlands-based company currently produces Diamond’s Kettle Brand vegetable chips and has its own premium brand in Europe with its Go Pure label veggie chips.
As a pure nut and snack play, Diamond is the best of breed and looks ripe for a takeover offer from Coca-Cola (KO), Pepsico (PEP) or even Dr Pepper Snapple Group (DPS).
The stock was pushing $100 in September of 2011 after reaching an intraday high of $96.13. However, accounting issues and irregularities crushed the stock, as shares tested the mid-$30s just two months later.
Diamond Foods ran into trouble with its nut-growers back then and was supposedly trying to move payments into different time periods. Under accounting rules, you cannot pay in a future fiscal year for a prior year’s crop, which is something they may have been trying to do.
These accounting issues haven’t been a problem in recent years, but it is a skeleton that is hidden in the company’s closet. Diamond Foods had to restate earnings over the next few years following the incident, which is why I don’t like trading the stock around earnings announcements.
Diamond Foods has a current market cap of $890 million. A takeover offer of $1.25-$1.5 billion to buy the company would have shares pushing $35-$40. Although current management might be capable of getting the company into its next phase of growth, Diamond Foods needs a shakeup, as shares have underperformed the market for years.
I love this trade as long as $27 holds into earnings, and I believe the current momentum could carry shares past $30.
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