Market Overview

Diamond In The Rough: Analysts See Company As Ultimate Winner For Pringles

Despite all controversy surrounding the company recently, Diamond Foods (Nasdaq: DMND) will probably be the ultimate winner for Procter & Gamble's (NYSE: PG) Pringles potato chip brand, according to two analysts that cover staples stocks. The analysts made the comments in exclusive interviews with Benzinga.

While questions regarding Diamond's accounting practices have swirled recently, there doesn't appear to be a plethora of possible replacement suitors at this point for Pringles should the Diamond deal collapse.

“There needs to be a favorable resolution to these issues before a deal can be finalized, but it doesn't appear there were a lot of buyers for Pringles to start,” DA Davidson Tim Ramey told Benzinga. Ramey rates Diamond a buy with a $60 price target.

Edward Jones analyst Jack Russo, who doesn't follow Diamond, but does follow PepsiCo (NYSE: PEP), agreed with Ramey that the world's second-largest soft drink maker isn't a likely suitor for Pringles because that deal would draw the ire of U.S. regulators from an anti-trust perspective.

“I'm sure Procter & Gamble is working on a plan B and a plan C,” Russo told Benzinga. “P&G will give Diamond every chance to be the ultimate buyer.”

Russo did note a private equity firm could be step in for Pringles, but he did not identify specific firms. The analyst also said Dow component Coca-Cola (NYSE: KO) probably would make a bigger move into the food space than acquiring a brand like Pringles.

Ramey said there could be interest for Pringles from Dow component Kraft (NYSE: KFT) and General Mills (NYSE: GIS), but said that's “a reach in both cases.”

Russo added Kraft could be interested in Pringles when it completes the split of its snack food unit from its grocery store business, but that spinoff isn't expected to be completed until fall 2012. The analyst, who does cover General Mills, the second-largest U.S. food company, said Pringles “doesn't fit with what General Mills is doing.”

Bottom line: It looks like Diamond Foods will ultimately get its hands on Pringles, if for no other reason than Procter & Gamble wants that to happen and because there apparently isn't an excessive amount of other potential buyers. Stay tuned to the ongoing Diamond Foods soap opera.


ACTION ITEMS:

Bullish:
Traders who believe that Diamond shares will rebound might want to consider the following trades:
  • Long the stock outright. The shares currently rest below many analysts' price targets.
  • Play it safe with the PowerShares Dynamic Food & Beverage ETF (NYSE: PBJ), which isn't really a factor in all of this.
  • Long P&G. It's the safer way to play this and features a nice dividend.
Bearish:
Traders who believe that Diamond will lose out on Pringles may consider alternative positions:
  • Long Pepsi. Bad news for a competitor could be Pepsi's gain.
  • Long Kraft. See Pepsi assessment.
  • Long General Mills and stay out of the potato chip game altogether.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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