Tickers in this Article: DMND, KFT, CAG, UL, PEP, JBSS
Snack and nut company Diamond Foods (Nasdaq:DMND) posted impressive fiscal third quarter sales and earnings, but the market drove the stock down anyway. The company is integrating its rapid expansion and raised guidance.

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A Larger Diamond
Diamond Foods, which owns Pop Secret Popcorn and Emerald Nuts, purchased Kettle Chips last year and Pringles this year, a $1.5 billion acquisition. By tripling the size of its business, Diamond is growing to compete with larger companies such as Kraft Foods (NYSE:KFT), Con Agra (NYSE:CAG), Unilever (NYSE:UL) and Pepsico (NYSE:PEP), not just the smaller niche competitors such as John B. Sanfilippo & Sons Inc. (Nasdaq:JBSS). (For related reading, see Mergers & Acquisitions: An Avenue For Profitable Trades.)

Earnings Increase
The costs for integrating the acquisitions chopped the adjusted earnings per share from 52 cents to the 34 cents, which is the reported figure. This compares to last year's quarter of a loss of 43 cents on the reported figures and a loss of 22 cents on the adjusted figures. While the adjusted EPS was an earnings beat, the $7.7 million in reported net income versus a loss of $42 million in last quarter came in under some estimates. Non-retail brands and the snack division powered the impressive sales performance for the quarter, which offset a decrease in in-shell and culinary segment sales. Revenue for the quarter was $223 million, up from $139 million in the year ago quarter. Gross margin rose 430 basis points from 22.4% to 26.7%, while operating margin was 7.9%. (For related reading ,see Analyzing Operating Margins.)

How Diamond Sees its Year
The company expects to finish its fiscal 2011 at $943 million to $953 million revenue, with its fourth quarter revenue between $210 and $220 million. The company projects year over year gross margin growth of 200 to 300 basis points, with net income to rise 52% to 55%. Earnings for fiscal 2012 are projected at $2.85 to $2.98, although this would be even more if the Pringles earnings are included. Some investors felt the guidance wasn't strong enough. (For more, see Can Earnings Guidance Accurately Predict The Future?)

What the Market Saw
Investors have to take the market's reaction seriously, or should, because what the market actually does rules over what investors feel like it should do. When, however, the market's take on a stock's earnings report is so skewed, some comment is needed. The market should get a miss on Diamond Foods. The company came out with its earnings in a week of concern and alarm, near-panic in some quarters. Selling has been brisk across the board in stocks. Though trading also rules, selling Diamond was unwarranted on its fundamentals. (For more, see What Are A Stock's "Fundamentals"?)

The Bottom Line
Diamond Foods is a company that has a tremendous growth strategy and knows how to execute. Its long term plan has been one of organic growth along with strategic acquisitions. Pringles will be a great product line fit for them once it's integrated, as Diamond's CEO Michael Mendes knows how to sell these products and battle through the vicissitudes of commodity fluctuations. One analyst, in contrarian mode, despite seeing the stock pushed under $70 a share, called the stock an $81 value. Diamond Foods is a classic case of a good stock being taken down in a bad market downdraft. Investors should be able to capture a terrific, underrated growth stock in Diamond Foods at these prices or lower. (For related reading, see Venturing Into Early-Stage Growth Stocks.)

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