essays pieces of the puzzle
Saturday, February 11th, 2012
counting nuts

I’m spending the weekend working on an accounting piece for The Finance Professionals’ Post, so I thought I’d take a break to look at the latest accounting disaster among high fliers.

The top panel of the chart shows the stock price of Diamond Foods (DMND).  Toward the end are these news events:

A) The stock jumps 12% after the company ups its earnings forecast for the year.  B) It gaps down 18% on news that the Pringles deal will be delayed due to a DMND internal accounting review.  C) The stock soars 53% after a KeyBanc analyst says the probe will “wrap up quickly and not jeopardize the acquisition.”  D) It falls 37% after the firm announces it will restate results.

In the middle panel you can see that the valuation was high going into these events, not allowing any room for error — and the line is based upon original numbers, since the restatements have not been made.  (Remember, too, that the most recent report available is for the period ending in July.)

At the bottom of the chart you can see the revenue growth rate that investors had been watching and the increasing size of the deals the company was attempting to do.

This might be a teachable moment when it comes to accounting risk (as if we haven’t had enough of them already).  I did not look back to see what clues had been lurking or whether any analysts or bloggers were on the trail before this came apart — please send along examples if you have them.

If you’re interested in doing a postmortem (as those who were trapped should), a November piece by Frank Voisin and one by John Hempton after the restatement announcement might provide some useful color.  (Chart:  Bloomberg terminal.)

everything is connected

The most recent posting on the research puzzle continues the focus since the beginning of the year on simple ideas of importance in the investment world.  When analyzing an investment firm, it’s critical to remember that everything is connected.  It’s typical to talk about the investment, operations, and marketing functions as separate worlds, but how those pieces fit together can tell you a great deal about “the reality of the professed philosophy and the sustainability of the performance.”