Why Diamond Foods' Earnings Could Disappoint Investors

Diamond Foods will release its quarterly report on Monday, and judging from the company's stock-price surge lately, investors have grown increasingly optimistic about the snack maker. Yet shareholders should be worried that Diamond Foods' earnings might not be able to keep pace with the expectations that many have for the company's recovery.

Diamond Foods spent much of the past year with its stock under pressure, as investors had trouble moving beyond past controversies about its accounting practices and its failed buyout bid for the Pringles business of Procter & Gamble. As the company seeks to move past those episodes, Diamond Foods faces the much more important task of competing against industry giants PepsiCo and Mondelez International , both of which have massive snack-food operations that dwarf Diamond Foods' niche areas. Let's take an early look at what's been happening with Diamond Foods over the past quarter and what we're likely to see in its report.

Stats on Diamond Foods

Source: Yahoo! Finance.

How will Diamond Foods' earnings fare this quarter?
Analysts have become somewhat more optimistic In recent months about the prospects for Diamond Foods' earnings, cutting their loss estimates for the quarter that ended in July in half and boosting their fiscal 2014 projections by $0.03 per share. The stock has performed even more strongly, rising 11% since late June.

Diamond Foods started the quarter on the right foot, with its stock posting a better-than-10% jump after the April earnings report revealed a surprise adjusted profit for the company. Although sales dropped 11%, they nevertheless came in more than 5% higher than analysts had expected. Investors were willing to ignore one-time charges from a plant closure and other restructuring activity as well as a company note that next-quarter sales would suffer from poor supplies of nuts.

But the big gains for the stock have come from progress in settling some of Diamond Foods' past problems. Last month, the company agreed to pay $11 million in cash and issue 4.45 million shares of stock to settle an investor class action lawsuit over the improper accounting of payments to walnut farmers. Combined with favorable guidance on revenue for the quarter, investors sent the stock soaring.

Still, the long-term challenge for Diamond is in competing with much larger rivals. PepsiCo has gotten an early start in identifying and adapting to the trend toward healthier food offerings, with CEO Indra Nooyi making what seemed like unpopular choices to go beyond junk-food products, promoting items like higher-fiber chips and reducing salt and fat levels. Mondelez's brands have more appeal for those with a sweet tooth, including Cadbury chocolates and Oreo cookies. But with a distribution network and shelf-space arrangements that rival PepsiCo's impressive status, Mondelez can also create a formidable presence for Diamond to overcome.

In the Diamond Foods earnings report, watch to see how the company plans to get back to fundamentals and build up its business once more. Even if it can put its controversial past behind it, Diamond still needs to prove to investors that it can grow its net income again before letting its share-price gains get too far ahead of its earnings results.

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The article Why Diamond Foods' Earnings Could Disappoint Investors originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends PepsiCo. 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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