He reiterates his Buy rating and $76 price target on the name.
- Although we had hoped for the investigation to be completed earlier, we view the mid- February completion date as reasonable especially given the number of reputable firms involved in the investigation (Deloitte, Gibson, Dunn & Crutcher LLP and KPMG LLP). We are glad to see a completion date, albeit a little later than we thought, because it removes uncertainty regarding timing. As far as the outcome of the investigation, our view remains unchanged. We continue to believe that the investigation will reveal that DMND has properly accounted for the various payments it makes to its growers. Furthermore, we continue to believe that the Pringles deal will go through. Regarding the latter, Procter & Gamble Co. (P&G) told us on December 12 that it was not surprised by DMND’s announcement to delay its 10Q filing and P&G remains committed to completing the Pringles deal.
- The mid-February completion date implies roughly three months from start to completion (investigation announced on November 1, outside firms engaged a week or so later). We believe the stock was weak today (December 12) because investors believe that three months is too long for an investigation that seems so straight forward. However, we point out that it took Green Mountain Coffee Roasters, Inc. (GMCR-NASDAQ) close to three months (80 days) to complete its internal investigation as well; GMCR started its audit committee review around September 20, 2010 and restated its financials on December 9, 2010.
- Robert Willens, a third-party consultant we hired in October, was not surprised by yesterday’s announcement. We assume the accuracy of Mr. Willens. Mr. Willens believes that the three-month time frame for the completion of the investigation is reasonable especially given that three very reputable firms are involved in the investigation. Furthermore, Mr. Willens continues to believe that the ongoing investigation will reveal that DMND has properly accounted for the various payments it makes to its growers and there is minimal risk of restatements related to payments to walnut growers. Regarding the risk of restatements, Mr. Willens notes, “The only thing, in my view, that could lead to a restatement is a finding that the contract has somehow been amended, superseded, or abrogated and that the accounting for the payments to the growers does not reflect the terms of the contract as so amended, superseded, or abrogated, in my view a highly unlikely occurrence.”
Regarding valuation, DMND’s stock is down 66% since September 20 (S&P500 is up approximately 3% over that period) owing entirely to a contraction in its 12-month forward PE, which has gone from 29.4x to 10.3x as of today's (December 12) close. At 10.3x NTM EPS (see Table 3), DMND trades at a 58% discount to its consumer growth
peers average of 24.4x and a 51% discount to its historical average PE of 20.9x (range of 8.7-31.9x)
Notablecalls: Jagdale caused a 50%+ move in DMND on Friday but the stock gave 2/3rd of it back yesterday after co announced the internal investigation would take 3 months to complete. Jagdale speculated on Friday the co would file its 10-Q on time, which of course did not happen.
Robert Willens, the 3rd party consultant does offer a compelling explanation for the delay: Lawyers. Deloitte, Gibson, Dunn & Crutcher LLP and KPMG LLP.
Billable hours. The more the merrier. The go over every little piece of the puzzle with a fine tooth comb. That's how these guys operate.
DMND stock has been an easy target to knock down but I do think Friday's move is not something the shorts want to experience again.
The short interest in DMND is probably still in the 50% range.
I'm thinking another short squeeze coming. $35+? Anyone?