The much-discussed transition from fossil fuels to sustainable fuels gets a lot of coverage in the media, but companies that are focused on the sustainabilty of essential supply chains are often overlooked. One such company is Darling Ingredients (DAR, Financial), which turns “edible by-products and food waste into sustainable products.” This slide from its third-quarter 2022 investor presentation provides an overview of what the company does. As we can see, it's focused more on making certain supply chains more sustainable and productive.
According to analysts' estimates from Morningstar (MORN, Financial), revenue could grow by an average of 14.11% per year over the next three years. Earnings per share without non-recurring items are expected to jump from $4.90 in 2022 to $6.19 in 2023 and $7.15 in 2024. The latter is 60% higher than the trailing 12-month EPS without NRI of $4.48.
About Darling
Darling has a long history, one dating back to a deal between the Swift meatpacking business and the Darling family in 1882. The company describes its current business model this way in its 10-K for 2021:
“We are a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, animal feed, industrial, fuel, bioenergy and fertilizer industries.”
It adds that it “collects and transforms all aspects of animal by-product streams into useable and specialty ingredients, such as collagen, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides.”
Darling also recovers and converts recycled oil, such as used cooking oil and animal fats, into feed ingredients. It has a renewable diesel plant in Louisiana in a joint venture with Valero Energy Corporation (VLO, Financial) which has the capacity to produce over 700 million gallons per year.
Darling operates on five continents: North America, Europe, Asia, Australia and South America. Its market cap is $10.76 billion and trailing 12-month revenue amounts to $6.074 billion. Year-ends roughly correspond with the calendar year, but vary from Dec. 28 to Jan. 2.
Competition
There are a couple of relatively unique aspects to Darling’s competition. First, it noted in the annual filing that it is the only global ingredients company using products from animal-origin raw material types. Nevertheless, it does compete with regional and local players in its end markets.
Second, competition is less about selling and more about buying raw materials. In North America, for example, the consolidation of meat plants has led to bigger and more efficient slaughtering operations. These plants do their own rendering, leaving less for companies like Darling. To some extent, that is offset by environmentalist pressures about the correct disposal of used restaurant cooking oil.
Named competitors include Cargill Inc., Tyson Foods, Inc. (TSN, Financial) and JBS SA (JBSAY, Financial). GuruFocus compares it with J M Smucker Co (SJM, Financial) and Campbell Soup Company (CPB, Financial), but as we can see, the sustainability-focused operations of Darling are growing much more rapidly than traditional processed food companies.
Fundamentals
Darling gets a relatively high GF Score of 87 out of 100, driven by solid ranks for momentum, GF Value, profitability and growth and held back by a low rating for financial strength:
As the following chart makes clear, Darling carries a significant amount of debt:
That leaves it with an interest coverage ratio of 7.21, which is adequate and consistent with the ratios of other food and beverage manufacturers:
It also makes the Altman Z-Score marginally acceptable. The score of 2.84 is in the grey zone, roughly a point above the distress zone and just shy of the safe zone, which begins at 3.00.
Return on invested capital comes in a 9.1%, roughly half a percentage point higher than its weighted average cost of capital at 8.47%.
Darling’s net margin, at 12.13% is industry leading; that’s better than 84.54% of companies in the consumer packaged goods industry. Return on equity is also industry leading at 21.69%, and the company has been profitable every year for the past 10 years.
The company gets high marks for growth, but it experienced a lot of volatility during the past three three years and before, as evidenced by this 10-year chart of EPS without NRI:
Darling does not pay a dividend, and its share count has declined only slightly since 2014. This is a company that is focused on growth.
Valuation
Thanks to a share price that has been volatile but range bound since November 2021, Darling is considered undervalued on a number of metrics.
That high GF Value rank is based on the price-to-GF-Value ratio. The share price was $66.47 at the close of trading on Feb. 3 while the GF Value chart assigned an intrinsic value estimate of $93.95, making it modestly undervalued. According to a historical study by GuruFocus, stocks with this kind of price-to-GF-Value ratio have tended to outperform in the past.
Considering the GF Value chart and the 10-year price chart, I believe Darling is modestly undervalued.
Gurus
11 gurus had stakes in Darling at the end of the third calendar quarter. According to 13F filings, Chris Davis (Trades, Portfolio) of Davis Selected Advisers had the biggest holding with 3,183,405 shares. Jeremy Grantham (Trades, Portfolio) of GMO owned 2,270,237 shares and Ken Fisher (Trades, Portfolio) of Fisher Asset Management held 1,216,702 shares.
Investors should know 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Institutional investors owned 93.08% of shares outstanding, while insiders held 2.69%.
Conclusion
Darling Ingredients has found a niche in the transition to a low carbon economy, one that has been rewarding in the past few years. As a result, it has become a solid company with strong fundamentals and great growth prospects, though I do find its debt levels concerning.
