UPDATE 1-Diamond Foods likely to default on debt covenants - analysts
10:39 am ET 02/09/2012 - Reuters
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Feb 9 (Reuters) - Diamond Foods Inc is likely to default on its debt covenants and cancel its biggest-ever deal, Wall Street analysts said, as the stock crashed 40 percent following an accounting scandal that cost the company's top management their jobs.
"Diamond's restatements will cause debt covenant default and ultimately raise interest expense," Janney Capital Markets analyst Mitchell Pinheiro said in a note, adding that Diamond's proposed buy of Pringles potato chips from Procter & Gamble Co was "finished."
On Wednesday, Diamond, maker of Pop Secret popcorn and Kettle chips, said it had improperly accounted for payments to walnut growers, and it would restate results for the fiscal years 2010 and 2011.
It removed Chief Executive Michael Mendes and named director Rick Wolford as acting CEO. It also replaced finance head Steven Neil with Michael Murphy of consulting firm Alix Partners.
SunTrust Robinson Humphrey's William Chappell, who had previously backed the company's accounting practices, cut the stock to "neutral" from "buy" admitting that he had been wrong.
"This is the worst case scenario, not only creating uncertainty around the financial statements and removing a senior management team that directed the solid growth of the past few years, but also likely rendering dead the pending Pringles deal," Chappell said in a note.
Janney Capital's Pinheiro reckons that Diamond is likely to earn about $1.70 a share in fiscal 2012. The company previously forecast adjusted earnings of $3.05 a share to $3.15 a share.
However, some believe that Diamond's stock is a good buy at its current levels of $22-$24, saying the company still has various strong brands.
"They still have good businesses - Pop Secret, Kettle and (Emerald) nuts," a Diamond investor who declined to be named told Reuters on Thursday.
"When cooler heads prevail, the stock should trade back up somewhere in the $30s, probably after a couple of quarters."
KeyBanc Capital Markets' Akshay Jagdale said that Diamond's various businesses were together worth about $44 a share. Janney's Pinheiro believes that number is $31 a share.
The company's stock was trading at $22.00 on Thursday on the Nasdaq.
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