Thursday, February 9, 2012

Diamond Foods (DMND) - The Full Story and What the Options Market Reflects

DMND is trading $22.92, down 37.5% with IV30™ down 23.0% as of ~10am EST. The LIVEVOL® Pro Summary is below.


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Diamond Foods, Inc. engages in processing, marketing, and distributing snack products. It provides snack products, including roasted, glazed and flavored nuts, trail mixes, dried fruit, seeds, microwave popcorn products, and potato and tortilla chips under the Emerald, Pop Secret, and Kettle brands.

This stock / company has been a regular disaster with claims and apparent realities surrounding falsified accounting. On 9-21-2011 this stock closed at $91.91… it’s down more than 75% in less than five months. Let’s start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™- blue vs HV180™- pink).

Lots of circles ‘n stuff ‘n stuff. Here’s a recap of the news on the rather abrupt stock move days:

9-16-2011: Stock closed up $9.07 or 11.6% to $87.30 on an earnings report.

11-2-2011: Stock closed down $11.33 or -17.7% to $52.79. Here’s a news snippet which was ever so portending.

What: Shares of nut and snack slinger Diamond Foods were getting boiled like peanuts today, falling as much as 24% on reports that Diamond's board is investigating some accounting procedures.

So what: While the day has been long on losses for Diamond shareholders, it's been short on details. The terse statement from Diamond simply said that the board launched an investigation after the chairman of the audit committee received "an external communication regarding Diamond's accounting for certain crop payments to walnut growers."

That's not much to go on, but the matter is serious enough that it's delaying the closing of Diamond's acquisition of Procter & Gamble's (NYSE: PG ) Pringles unit. That deal is now expected to close in the first half of next year.

Source: The Motley Fool via Yahoo! Finance: Diamond Foods Shares Plunged: What You Need to Know, written by Matt Koppenheffer

11-23-2011: Stock closed down $7.17 or -20.5% to $27.80 on news that a board member killed himself. There were questions as to whether the death had anything to do with the ongoing probe. I found this snippet from Barron’s: Diamond Foods: Tragedy Sends Shares Tumbling

12-9-2011: The stock closed up $14.01 or 52.8% to $40.56 on news from a KeyBanc Capital Markets Inc. analyst said "a probe into payments to walnut growers will wrap up quickly and not jeopardize the acquisition of Pringles from Procter & Gamble Co. (PG)." Source: Bloomberg via Yahoo! Finance -- Diamond Soars After Report Says Probe Won’t Derail P&G Deal, written by Matthew Boyle.

12-12-2011: Stock closed down $9.26 or -22.8% to $31.30 on this news from the AP:

Shares of Diamond Foods Inc. slid more than 10 percent in premarket trading Friday after a published report of a federal inquiry into whether the snack maker's financial practices involved criminal fraud.

On top of that, two large stockholders recently sold most of their shares.

At issue is Diamond Foods' accounting for crop payments to walnut growers.

Source: AP via Yahoo1 Finance -- Ahead of the Bell: Diamond Foods

Note that the 12-12-2011 news was the next trading day after the 52.8% pop on 12-9-2012.

And finally...

2-9-2012: Stock is down 37.5% on this news:

(Reuters) - Diamond Foods Inc (DMND.O) plunged 40 percent in premarket trading after the company removed its top management and said it would restate results due to improper accounting of payments to walnut growers, prompting at least one brokerage to downgrade its stock.

Analysts said Diamond's proposed buy of Pringles from Procter & Gamble Co (PG.N) would not go through, and that the company would likely default on its debt covenants.

"Diamond's restatements will cause debt covenant default and ultimately raise interest expense," Janney Capital Markets analyst Mitchell Pinheiro said in a note, adding that the Pringles merger was "finished."

"This is the worst case scenario, not only creating uncertainty around the financial statements and removing a senior management team that directed the solid growth of the past few years, but also likely rendering dead the pending Pringles deal," Chappell said in a note.

Source: Reuters via Yahoo! Finance -- Diamond Foods plunges after probe finds improper accounting, written by Mihir Dalal

What’s interesting with all that, looking back to the Charts Tab waaaay up there, is that this time the news is “bad” wrt stock price, but the vol is imploding. The trend had been an up tick pushed vol down and the down ticks pushed vol up – not this time. This, in my opinion, is a reflection from the option market that the worst news is out. This is the catastrophe, the worst case scenario, the… end of the bad news. Well, not quite that far – the implied is still elevated to the long-term historical realized vol which is at 87.30%. But, keep in mind that HV is calculated close-to-close so HV180™ (and HV20™) will rise tomorrow.

Let’s turn to the Skew Tab.

We can see the Feb10 weeklies are elevated to the Feb monthlies which are, in turn, elevated to the Mar monthlies. This is pretty normal behavior as the stability of the underlying price is certainly in flux as of the news today. I do note a slight upside skew in the Feb expiries which reflect the risk (potential) of a stock rebound in the near-term.

Finally, let’s turn to the Options Tab.

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. But, we can see the vols are priced to 130.34%, 106.57% and 89.84% for the Feb(W), Feb monthly and Mar monthly expiries, respectively.

I’m not a huge believer in "the risk is depressed" argument given the disclosures. I have no idea if the impropriety will have (or has had) a substantial effect on actual cash flow and earnings, or if it’s more of a personal problem for a few folks that may get in trouble, but otherwise had little impact on the firm as a going concern. For all we know, this firm is actually worth $90 / share. Or, it’s worth nothing and is in fact a mirage (doubtful).

On a side note, in another life, I was the director of research for a quant fraud modeling firm (Audit Integrity) and I can tell you that the empirical data points to often times disastrous implications to a firm that uncovers what "seems" like isolated fraud. An environment of fraud is often not isolated.

This is trade analysis, not a recommendation.

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1 comment:

  1. accounting fraud or the appearance of it is a death wish for a company. We live in a country where the integrity of our financial accounting is the heart of our investment community, without it, we have not stock market. Diamond is dead