Darling International: Dirty Sexy Money

No, I’m not talking about the new hit ABC show or it star, Tripp Darling, AKA Donald Sutherland. (Note: Donald Sutherland still puts the fear of god in me ever since his role as the delusional pyromaniac in Backdraft).

I see some serious potential in another Darling, Darling International, Inc. (DAR). Darling provides rendering, recycling, and recovery solutions to the food industry primarily in the United States. It has two segments, Rendering and Restaurant Services.

• The Rendering segment engages in the collection and processing of animal by-products. It converts these products principally into usable oils and proteins utilized by the agricultural, leather and oleo-chemical industries.
• The Restaurant Services segment involves in the collection of used cooking oils from food service establishments and recycling them into similar products, such as high-energy animal feed ingredients and industrial oils. It also provides grease trap collection services and sells equipment to restaurants.

Earlier this month Darling released their Q3 earnings to prior year data:

• Revenues were $171.8 million vs. $115.2 million. (An increase of 49%.)
• Selling, general & administrative expenses grew 15%.
• Income before taxes was $19.7 million vs. $2.5 million. (An increase of 688%.)
• Earnings Per Share of .15 vs. .02. (An increase of 650%.)

For the nine months ended September 20, 2007:

• Revenues were $469.9 million vs. $278.9 million in the prior year, advancing 68%.
• Selling, general & administrative expenses rose 21%.
• Pre-tax income was $50.7 million vs. a loss in the prior-year period of $1.9 million.

As the earnings numbers indicate, this is a serious growth story. DAR closed the day at 17X 2007 earnings and 14X 2008 earnings, putting its price/sales at 1.33. The downside is its stock price has increased nearly 40% since its recent low in August. For fiscal year 2007, analysts estimate that DAR will earn $0.56. For the 3rd quarter of fiscal year 2007, DAR announced earnings per share of $0.15, representing 27% of the total annual estimate. So if DAR continues the EPS growth for Q4 of a conservative 400% for year over year (200% less than Q3 and YTD growth), Q4 would post a .28. Putting the fiscal year 2007 EPS at .67, betting the analyst estimates by roughly 20% and a 850% year over year. For fiscal year 2008, analysts estimate that DAR's earnings per share will grow by 27% to $0.71 based on previous estimates.

Additionally, as of October 24, 2007, Darling International Inc. moved from the AMEX to begin trading on the NYSE. This switch will increase Darling’s trading and brokerage coverage.

Other Considerations

On September 27, 2007, the Food and Drug Administration Amendments Act of 2007 (the Act) was signed into law as a result of Congressional concern for pet and livestock food safety, following the discovery of adulterated imported pet and livestock food in March 2007. The Act directs the Secretary of Health and Human Services [HHS] and the Food and Drug Administration [FDA] to promulgate significant new requirements for the pet food and animal feed industries. The impact of the Act on Darling is still up in the air until further clarification by the FDA. Based on some common sense assumption, one would expect for the Act to call for further requirements that would be inline with potential growth for Darling.

Upon listening to the Q3 press release, there was some talk of future acquisitions to further help Darling’s International growth. Currently, Darling receives 25% of its revenue from international markets (China, Europe, Canada and Mexico).

Secret Weapon…

The hidden gem: the aftermath of deep fryers and restaurants' grease traps (aka - yellow grease). I’m not talking about Homer Simpson selling grease for extra cash. Experts predict that the US produces enough yellow grease annually to generate over 500 million gallons of biodiesel. Darling has already seen its alternative by-products increase significantly, with significantly more room to grow.

I leave you with a quote from Backdraft as an omen to Biodiesel consumption, when DeNiro’s character asks Donald Sutherland what he would like to do to the whole world:

“Burn it all.” (Insert creepy Sutherland laugh here).

Disclosure: Author has a long position in DAR in several portfolios, but positions can change any time.

Comments

[DanielJacome]

DAR is a top investors business daily pick in their "best ideas under 10" service...good article, good movie quotes -- thanks!

this is an idea that should benefit from increased sell side coverage......

[biodieselmama]

Darling has had no significant competition for business up to this point. In some areas it is a monopoly being the only option for companies to collect their waste oils. But this is changing on a national basis. For years darling has required companies to pay $50-$80 a barrel for collection. Now Darling is facing nationally new businesses that will collect for free or even pay for the oil. Their business model is based on the fact that waste oil had very little value, but now because of biodiesel and the desperate need for a cheap alternative to soy and other crops waste oils are now the hottest oil in the biodiesel feedstock competition. I have started a collection business in CA for these same reasons. CA doesnt grow a crop for biodiesel, the soy price increase has made it to expensive to rail here, and now palm is even getting to high to ship here. Waste oils are the prime feedstock in CA, and companies know that what they have is becoming increasingly wanted. I am taking for free from most and paying a very small amount to a company that has a foundation to green their business. What I pay will go to the foundation. I am selling the oil directly to local biodiesel producers. I am charging am amount that is within their margin to keep them in business. Businesses like mine are popping up all over the country. It's called sustainable biodiesel, local collection or cropping of oils, that go to local producers, that distribute to the local community. All the money is kept within a region and jobs are created locally.
Small businesses are created to service them meaning more jobs. With local biodiesel the price of biodiesel blends stabalizes and decreases. To get the US out of the mess we are in financially and with global warming, we have to buy local and at least buy USA.

[User 128504]

Nice article Benjamin. I also think DAR has good potential. Posted about it here:
www.tradeforgain.com/?...
www.tradeforgain.com/?...

regards - Sharp2be - TradeForGain.com