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Diamond Foods Valuation Under Pressure

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After nearly a year of keeping investors in the dark, Diamond Foods (NASDAQ:DMND) reported 2012 quarterly earnings and restatements to the company's 2010 and 2011 annual earnings, which helped to put accounting issues behind the snack maker, but raised new questions about the company's valuation and growth outlook.

In a set of earnings released after the market close, Diamond Foods, the maker of Emerald Nuts, Pop Secret, and Kettle Chips snacks, said that restatements to previous years' earnings were less than a February audit committee review of the firm's accounting practices indicated.

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While senior management stressed that the long overdue earnings put to rest many of the accounting issues lingering over the firm, the company's 2012 earnings came well short of expectations and raised the prospect that a late May recapitalization by distressed debt fund Oaktree Capital (NYSE:OAK) will dilute shareholders.

For the first three quarters of 2012, Diamond Foods reported a net loss of $53.4 million or $2.46 per share, as new arrangements with the company's walnut suppliers and overhead costs cut at the company's bottom line.

Because walnut supply costs ran higher than optimistic terms laid out in Oaktree Capital's $225 million late May loan, Diamond Foods was unable to acquire the walnut volumes to trigger a redemption of $10 warrants in the company's stock that represent 16.4% of its outstanding shares, and may cause common investors to be diluted at discount prices.

Meanwhile, Diamond Foods' higher costs imply a new growth profile for the San Francisco-based company, and an initial outlook provided by management of up to $980 million in full-year 2012 revenue and $81 million in earnings before interest, taxes depreciation, and amortization project near 30% year-over-year declines.

The mix of a leaner profitability outlook and the prospect that Oaktree Capital will be able to convert its warrants at discount prices sent Diamond Foods shares to new lows since its accountancy issues came to a head in February.

In early Thursday trading, Diamond Foods shares were off over 22% to $15.20, a new five-year low in the company's stock.

On the positive side, Diamond Foods management stressed on a conference call with investors that restatements and 2012 earnings remove a cloud of uncertainty and will help the company focus on the future and growing its popular up-market snacks brands once more.

Meanwhile, Diamond Foods also has a "runway" to turn its earnings around after the company reached a forbearance agreement with a syndicate of bank lenders by Bank of America (NYSE:BAC), which removes restrictive loan covenant and gives management the flexibility to re-position the company.

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