Net sales for the most recent quarter grew by 10.7%, but when we strip out recently introduced beers, the true year-over-year organic growth level drops to just 3.4%. Introducing new beers isn’t a bad thing, and it certainly helps keep beer enthusiasts who have insatiable palates occupied, but 3.4% organic growth doesn’t go nearly far enough to explain why this company is valued at 41 times next year’s earnings projections.
Year to date, lower capacity utilization has also hurt Craft Brew Alliance Inc (NASDAQ:BREW), resulting in gross margins that are down 240 basis points from this time last year. This leads me to question whether we are about to see a glut of craft brewers sour the market. According to the Brewers Association, the number of breweries in the U.S. has jumped from just 89 to more than 2,500 in approximately 35 years. I believe that’s far, far too much beer capacity to meet demand and would bet on industrywide weakness until production as a whole slows or industry consolidation occurs. With an already hefty valuation, I think you can easily leave this beer on the shelf.
Sometimes you feel like a nut, sometimes you don’t
It’s certainly been a long road for walnut producer Diamond Foods, Inc. (NASDAQ:DMND), which has put shareholders through the wringer after it was probed for making improper payments to walnut growers in 2010 and 2011.
But things are completely different now that the company is more than a year removed from its initial investigation. According to a company press release, it has settled on a shareholder lawsuit for $96 million, to be paid with $11 million in cash and 4.45 million shares in stock, and boosted its fourth-quarter sales outlook to a range of $196 million to $201 million from the current consensus of $187 million. Yet I’d still take pause at these results and use yesterday’s big spike as all the more reason to sell and not look back.
To begin with, there’s the PR damage caused by Diamond Foods, Inc. (NASDAQ:DMND)’ walnut scandal, which is going to make future deals tough to come by, and cost it them the chance at diversifying their product lineup by purchasing the Pringles brand from Procter & Gamble. Instead, Kellogg Company (NYSE:K) swooped in once Diamond Foods’ situation deteriorated and scooped up the Pringles brand from P&G for $2.7 billion, and it has been reaping the overseas rewards of this purchase ever since. It takes just a few bad acts to spoil a company’s reputation, and it could be quite a while before Diamond Foods’ previous buyers and investors are willing to give it a second chance.
As my Foolish colleague Travis Hoium also pointed out yesterday, Diamond Foods is leveraged to the hilt. The company ended last quarter with a debt-to-equity of 189% and plans to finance its settlement by releasing 4.45 million shares. In other words, it’s going to increase its share count by 20% and dilute existing shareholders just to take care of wronging previous shareholders. To me, it sounds like more of the same for Diamond Foods.
