I believe Darling International (DAR) is a compelling long idea for several reasons. Investors have yet to give the company full credit for their 2010 acquisition of Griffin industries. In addition, DAR's current valuation also does not include the significant positive impact of its joint venture with Valero to construct a biodiesel facility co-located with one of Valero's refineries.
In their most recent 10-Q filing, DAR describes itself as follows:
The Company is a leading provider of rendering, cooking oil and bakery waste recycling and recovery solutions to the nation's food industry. The Company collects and recycles animal by-products, bakery waste and used cooking oil from poultry and meat processors, commercial bakeries, grocery stores, butcher shops, and food service establishments and provides grease trap cleaning services to many of the same establishments.
Acquisition of Griffin Industries
DAR closed on its acquisition of private rending company Griffin Industries in December 2010. Darling added a poultry rendering business, to complement DAR's beef rendering business, and a bakery recycling business.
Joint Venture with Valero
The JV is constructing a renewable diesel facility to be completed by end of 2012 that will be co-located with the existing Valero refinery in Norco, Louisiana.
The facility will produce 137mm gallons of renewable diesel annually using DAR-rendered fat as feedstock with Valero as the off-taker. The 137mm gallons of renewable diesel meets Valero's requirement under the Renewable Fuel Standard (RFS2).
The value of the JV is driven by the spread between soybean oil and DAR's feedstock. At current prices the JV would generate approximately $200mm of EBITDA with 50% going to DAR. This would increase EBITDA by 25%.
At $15.38 per share DAR has a market capitalization of $1.8 billion and an enterprise value of $2.1 billion. With $330 million of debt on its balance sheet, DAR is very modestly levered. In fact, at its current valuation a strong argument could be made for DAR to engage in a levered recapitalization in which it issues $1 billion of debt and buys back shares.
DAR's trailing 12 month EBITDA is $358 million implying a current valuation of 6x. Further, when DAR announced Q4 2011 and full year 2011 earnings in early March trailing EBITDA should increase to $400mm as the full year impact of the Griffon acquisition comes into the financials. This implies a multiple of only 5.3x. Historically, DAR has traded in the 7-9x range. This implies 30% to 70% of upside. Further, the Valero JV could add up to $100 million to DAR's EBITDA in 2013. If DAR was created at 8x $500mm of EBITDA the enterprise value would be $4 billion, which equates to almost $33 per share a 116% return to the current price.
DAR is undervalued today and has a near-term catalyst in earnings given the optics of having the full year impact of Griffin in the trailing numbers and has a long-term catalyst in the Valero JV that could increase EBITDA by 25%.