Diamond Foods (DMND) remains on the Hedgeye Consumer Staples LONG Bench.
SUMMARY
The original LONG thesis on DMND was based off of margin improvement, and/or a strong chance of it being acquired. It appears that the latter will be coming true as a rumor has broken out about Kellogg (K) acquiring the entire company for somewhere between $35 to $40 per share. With the stock currently at $34.57 up just 5.30% from yesterdays close of $32.83, doesn’t seem that there is much additional upside.
The real question is how desperate is DMND to sell, will they look at this range as a fair value? Or will the Board require a greater premium in order to sell the company? We think up to $40 is what DMND is worth, but not more than that, leaving little upside from the current share price.
THE PIECES
Previous reports said they were struggling to sell the company as one unit. No surprise here, Pop Secret and Emerald are less than desirable assets. Pop Secret is in a category of the past, as consumers prefer Ready-to-Eat popcorn over microwave varieties, and Emerald, a lower tier brand competes in a category where prices are high, giving anyone with the edge on price (private label) the edge on the market.
Kettle Chips seems to be their saving grace from a sale perspective and will without a doubt obtain the highest purchase price multiple. Kettle is not without its challenges though. They compete as a regional brand in a very saturated market with the likes of PepsiCo and Synder’s-Lance, making it very hard for them to gain serious distribution versus the competition.
HEDGEYE OPINION
What does this mean for Kellogg? If they turn out to be the eventual buyer, we will still be keeping K on the SHORT bench. Although we like their further diversification of the portfolio, we don’t like Pop Secret or Emerald. We do believe that Kettle will be a great buy, as K will be able to expand the brand more effectively given their distribution capabilities versus DMND.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
