NEW YORK/TURLOCK, California Diamond Foods Inc (DMND.O) shares jumped nearly 53 percent on Friday, after an analyst said the company would likely come out of its accounting probe quickly and without evidence of wrongdoing.
Diamond Foods, maker of Emerald nuts, Kettle potato chips and Pop Secret popcorn, is in the midst of an investigation by its audit committee into the way it accounted for payments to walnut growers.
KeyBanc Capital Markets analyst Akshay Jagdale said in a research note that the chances of a restatement of costs related to the payment were low, and that Diamond would likely be able to carry out its plan to buy Pringles from Procter & Gamble (PG.N) even though the deal was delayed due to the probe, an announcement that sent its stock tumbling.
Through Thursday's close, Diamond shares had lost 59 percent since the start of November, and were down 72 percent from an all-time high touched in September.
They closed up $14.01, or 52.8 percent, at $40.56 on the New York Stock Exchange on Friday, the last business day before Diamond's deadline to file its quarterly financial report, which is on Monday, according to Jagdale.
It was "an emotional response," said Bevmark Consulting CEO Tom Pirko of the market's reaction. "What is not being properly accounted for is the relative damage that has been done to Diamond Foods by the recent second-guessing."
Adding to the recent cloud over Diamond was the November suicide of Diamond board member Joseph Silveira, who was on the audit committee but recused himself from the probe since the firm he was president of manages walnut-growing properties.
Police in the small town of Turlock, California, where Silveira shot himself at his suburban-style home, finished their investigation. They called it a suicide but did not release any details about a motive.
A report from the Stanislaus County coroner's office said Silveira died at a hospital from a self-inflicted gunshot wound above his right ear.
Silveira's son referred calls to a family attorney, who declined to be interviewed.
A spokesman for Diamond has said rumors of a link between the probe and the suicide were "unfounded."
NUTS AND BOLTS
The probe centers around a certain "momentum payment" made to growers on September 2, just days after Diamond's final payment for the 2010 crop.
Diamond said the payment was "designed to reflect the projected market environment prior to the delivery of the 2011 crop" in documents it sent to growers over the summer.
Yet critics, including one analyst whose firm specializes in short-sale recommendations, believe the payment was meant to make up for underpaying growers earlier in the year. They say delaying payments to growers would have lowered Diamond's costs in fiscal 2011, which ended on July 31, making its earnings look better at a time it was negotiating the Pringles deal.
According to "Grower Guidelines," which the company sent growers in the summer, it expected to make its first delivery payments for the 2011 crop in October. It then plans a progress payment in February and final payment in August.
The walnuts are harvested in the autumn.
More than half of Diamond's outstanding shares are held in short positions - bets that they will decline.
The stock's spiral called the Pringles deal into question, since it calls for Diamond to pay for Pringles with shares, as well as debt in an amount to be determined by the stock price.
Three growers in California, who declined to be identified by name, told Reuters that a Diamond executive told them the payment was connected to the 2010 crop.
But Jagdale, the KeyBanc analyst, said he had seen documentation showing that Diamond had made a similar payment in August 2010, which was included in fiscal 2011 costs and approved by Diamond's accountants.
"We believe the ongoing investigation will reveal that Diamond has properly accounted for the various payments it makes to growers," Jagdale said.
Jagdale said he based his opinion on his understanding of Diamond's walnut business plus discussions with walnut growers and Robert Willens, a tax consultant KeyBanc hired in October.
In a recent interview with Reuters, Willens also said he didn't think Diamond did anything wrong.
"Accounting rules are not designed to remedy bad deals that people enter into," Willens said.
(Reporting by Martinne Geller in New York; Additional reporting by Dan Levine in Turlock and Mihir Dalal in New York; Editing by Derek Caney, Gunna Dickson, Tim Dobbyn, Gary Hill