Diamond Foods Outline
1. Diamond Foods, Inc.
a. September 2011
i. Mark Roberts received a phone call from an anonymous caller insisting that Diamond had sent “momentum payments” to growers toward 2011 harvests. 1. These payments were thought to be payments towards 2010 harvests but being paid in 2011 to boost 2010 numbers. ii. Diamond announced plans to Purchase Pringles potato-crisp from Procter & Gamble. iii. Roberts is Founder of Off Wall Street Consulting Group- His reputation is based on him being one the more Prescient stock analysts. 1. Only makes 20-25 recommendations per year so he doesn’t do so lightheartedly. iv. Roberts felt that the anonymous caller had provided enough detail to warrant investigation. 1. Roberts is determined to obtain copy of the letter regarding the “momentum payments” b. Diamond in the Rough- History of Diamond Foods, Inc.
i. Diamond Foods was a cooperative created by farmers in 1912. 1. Name for Diamond Foods is based on the most precious of stones, the diamond. a. Nuts produced by Diamond Foods must be of the strictest quality standard; only plump pretty nuts were marketable under the Diamond Foods name. ii. Headquartered in Stockton, California.
1. Best quality nuts came from California.
a. 99 percent of the commercial U.S. Walnut supply and three quarters of the world supply came from California as of 2012. b. Annual harvest is from late August to late November.
2. Diamond nuts were sold primarily as a cooking ingredient. a. Tastes began to change in the 1990’s
i. New markets had to be established.
c. A Suit Enters a Blue-Jean Business
i. Michael J. Mendes, a 33 year old business man becomes CEO of Diamond Foods, Inc. 1. Raised in Oakdale California
2. Joined Diamond foods as vice president of sales in 1991, became CEO within 6 years. ii. Mendes began establishing new markets
1. Expanded culinary line by adding varieties of nuts.
2. Broke into the snack food market with the creation of the Emerald line of nuts and nut-and-dried-fruit mixes. a. Appealed to younger consumers;
i. Offered fruit and nut snack mixes in slim on the go canisters. b. Emerald boosted Diamond revenue by 14% in 2004.
d. Cracking a New Nut
i. Mendes started lobbying farmers to support the conversion of Diamond Foods from a grower-controlled cooperative to a publicly traded company. 1. More than 80% of the members voted for the conversion in 2005 and Diamond Foods became a publicly traded company. a. Diamonds Foods issued 6.7 million shares of stock and cash totaling $120 million to former farmers. b. Stock was sold to the public which raised about $150 million. i. Used to pay off debt and acquire equipment.
c. The Farmers were no longer members of the cooperative; they remain suppliers to the company. i. Offered contracts that last either 3, 5, or 10 years
1. Most farmers chose a one year contract.
ii. The company dictated how much they paid for each year’s crops. 1. Payments were made in installments; the final payment would be made after the harvest. d. In May of 2006 Diamond announced the purchase of Harmony Foods for $18 million. i. In just a few months Diamond issues annual financial report reporting net sales of $447 million and Cost of Sales of $412 million. 1. Gross margin percentage of 14.3
2. Diluted earnings per share $0.47
e. Growers Committee for a Fair Price from Diamond was created in 2007 by a group of 42 Farmers who were not happy with the company’s new direction. i. Complained that Diamond had underpaid by more than $20 million for the 2005 harvest and nearly $30 million for the 2006 harvest. e. Growth through Acquisitions
i. Pop Secret was purchased from General Mills for $190 million in August of 2008. 1. Second largest microwave popcorn brand.
2. Diamond is brought into direct competition with PepsiCo
3. Diamond Food stock grew from $20 a share to $35 a share in 2009 after the acquisition of Pop Secret. 4. Net Sales
i. Net Sales grew...
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