Should Investors Trust Diamond Foods Again?

Should Investors Trust Diamond Foods Again?

Investors pushed shares of Diamond Foods up more than 21% on Wednesday. However, don't call it a comeback just yet. Earlier this week, the snack-food company forecast better-than-expected fourth-quarter results and proposed a settlement to resolve a class-action suit, which was brought against the company in late 2011. The question on many investors' minds now is whether this warrants buying the stock. While these developments look great on the surface, a closer look may reveal it's too soon to jump back into the stock.

Guiding up
When Diamond Foods serves up its fourth-quarter results next month, the company expects revenue to fall between $196 million and $201 million. That's notably higher than the $187.4 million analysts were hoping for, according to FactSet. The company's full-year guidance also came in ahead of expectations, with fiscal 2013 sales estimated to be between $860 million and $865 million, compared to $851.7 million.

However, Diamond needs to do more than beat already low quarterly expectations if it's going to earn my trust again. Remember, only a year ago the company was involved in an accounting scandal, which forced it to restate two years of earnings. That incident also cost Diamond the iconic Pringles business. The snack giant had planned to purchase Procter & Gamble'sPringles brand last year in an all-stock deal valued at $1.5 billion.

Had the deal gone through, Diamond Foods would now be the second-largest snack maker after PepsiCo.Unfortunately, Diamond lost the Pringles bid last year following the internal investigation that exposed improper payments to walnut growers. As a result, Procter & Gamble ended up selling its Pringles business to cereal maker Kellogg for a cool $2.7 billion.

Looking to the future
That brings us up to date. Diamond Foods this week agreed to pay $11 million in cash and issue 4.45 million shares of common stock to resolve the class action over the company's accounting probe. In its settlement plea, Diamond denies all claims of wrongdoing or liability. While the court still needs to approve the settlement, it's a step in the right direction for this troubled company.

Moreover, Diamond's portfolio of popular snack brands, including Pop Secret popcorn and Kettle Brand chips, position the company well within the broader snack market. However, Diamond needs to do damage control to revive its relationship with walnut growers going forward. Ultimately, I think there are safer stocks for investors in the snack-food arena.

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Fool contributor Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends PepsiCo and Procter & Gamble. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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