Jefferies Comments on Diamond Foods (DMND) Debacle
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Price: $16.70 +0.97%
Rating Summary:
0 Buy, 12 Hold, 0 Sell
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Today's Overall Ratings:
Up: 11 | Down: 35 | New: 23
Rating Summary:
0 Buy, 12 Hold, 0 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 11 | Down: 35 | New: 23
Trade DMND Now!
Jefferies commented on Diamond Foods (NASDAQ: DMND) Thursday following last night's restatement, Chairman/CEO and CFO replacement and admission of improper payments. The firm now assumes the Pringles deal will be called off and said many questions remain.
Diamond Foods noted the restatement was due to a breakdown of internal control. Commenting on this, Jefferies said "We assume this would mean an unauthorized communication about the nature of the walnut payments that would change their accounting treatment from a pre-payment to a bonus payment." The firm said they hope to learn more details.
On the debt covenant, the firm said they assume that the net $40 million EBITDA reduction caused a violation of DMND's debt covenants. "While we find it unlikely that the banks would be interested in calling the loans and owning DMND, we would expect at least an increase in DMND’s coupon for the outstanding debt. An increase from the effective interest rate of 4.5% in FY11 to, e.g., 10% would mean a $0.91 reduction of EPS at the FY11 tax rate of 31.3% (16.5 cents per point of interest)."
On the future of the Pringles deal, the analyst notes comments on P&G's (NYSE: PG) website give them the impression that the Pringles acquisition will fall through. If this is the case, DMND would have to pay P&G a $60 million break-up fee plus up to $6 million of related costs. After tax, that translates into an EPS reduction of as much as $2.04.
On the profitability of individual lines of business, the firm notes the FY11 adj. EBIT reduction to about $77 million and a resulting EBIT margin of roughly 8% causes questions about the profitability of the walnut business. "If it is in fact losing money, DMND should consider exiting the business, despite its heritage. On the other hand, if the walnut business was still profitable, the margins for the snack operations would have to be much lower than we would have thought, presumably due to high promotional spending."
On the cost of the whole matter, the firm estimates that every incremental $10 million in costs reduces DMND's EPS by $0.31 while a $10 million revenue reduction due to management distraction causes a $0.02 EPS drop, all else equal.
The firm maintained their Hold rating and price target of $27.00
For an analyst ratings summary and ratings history on Diamond Foods click here. For more ratings news on Diamond Foods click here.
Shares of Diamond Foods closed at $36.66 yesterday, with a 52 week range of $26.11-$96.13.
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Diamond Foods noted the restatement was due to a breakdown of internal control. Commenting on this, Jefferies said "We assume this would mean an unauthorized communication about the nature of the walnut payments that would change their accounting treatment from a pre-payment to a bonus payment." The firm said they hope to learn more details.
On the debt covenant, the firm said they assume that the net $40 million EBITDA reduction caused a violation of DMND's debt covenants. "While we find it unlikely that the banks would be interested in calling the loans and owning DMND, we would expect at least an increase in DMND’s coupon for the outstanding debt. An increase from the effective interest rate of 4.5% in FY11 to, e.g., 10% would mean a $0.91 reduction of EPS at the FY11 tax rate of 31.3% (16.5 cents per point of interest)."
On the future of the Pringles deal, the analyst notes comments on P&G's (NYSE: PG) website give them the impression that the Pringles acquisition will fall through. If this is the case, DMND would have to pay P&G a $60 million break-up fee plus up to $6 million of related costs. After tax, that translates into an EPS reduction of as much as $2.04.
On the profitability of individual lines of business, the firm notes the FY11 adj. EBIT reduction to about $77 million and a resulting EBIT margin of roughly 8% causes questions about the profitability of the walnut business. "If it is in fact losing money, DMND should consider exiting the business, despite its heritage. On the other hand, if the walnut business was still profitable, the margins for the snack operations would have to be much lower than we would have thought, presumably due to high promotional spending."
On the cost of the whole matter, the firm estimates that every incremental $10 million in costs reduces DMND's EPS by $0.31 while a $10 million revenue reduction due to management distraction causes a $0.02 EPS drop, all else equal.
The firm maintained their Hold rating and price target of $27.00
For an analyst ratings summary and ratings history on Diamond Foods click here. For more ratings news on Diamond Foods click here.
Shares of Diamond Foods closed at $36.66 yesterday, with a 52 week range of $26.11-$96.13.
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*NEW - Download StreetInsider's FREE iPhone and iPad App - Click Here
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