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Introduction

Darling International (DAR) is a $1.35 billion company in the food processing industry. Market capitalization competitors in this industry include Dean Foods, Corn Products, and Hormel Foods. The food processing industry is down 21.21% over the past year compared to the S&P 500 which is down 17.00% during the same period. Over the past month, the industry has been down 7.12%, while the S&P 500 has been down 7.73%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, major drug stocks like Darling will see future benefits. Also Darling’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Darling produces. According to Reuters, Darling “provides rendering, recycling and recovery solutions to the United States food industry.” Based on two segments, rendering and restaurant services, Darling is able to carry out its business model. The rendering business focuses on turning animal waste from inedible products into industrial use. The restaurant services segment is similar to the rendering business, expect for a few changes. The changes involve collecting grease, instead of inedible waste from the restaurants to be turned into different products. These products include soaps, pet food, and leather. Collecting from nearly 115,000 food establishments, as the food business continues to grow, so will Darling. And as Darling is an international corporation, there is a huge potential to tap the emerging markets for even higher profit and returns.

Growth

Darling has illustrated solid growth prospects over the past year. According to Reuters, Darling reported a $0.65 billion revenue product last year. This number is up over 51.03% than it was the previous year. Compared to the industry’s average of 2.01%, investors see the relative strength compared to other competitors. This number is higher than the company’s five year average of 19.84%. Moreover competitor annual averages of 20.06% (Dean Foods) and 28.61% (Corn Products) are lower than Darling’s current figures. And given that Darling’s five year average of 19.84% is higher than the industry’s five year average of 3.61%, this company has the potential to move even higher. Darling’s earnings grew at a strong 311.25% last year—a number much higher than the industry average. Competitors such as Corn Products only saw a 36.71% increase and Hormel Foods saw a disappointing increase in earnings of 12.00%. Therefore, both earnings and revenue growth is strong for Darling.

In addition, Darling has kept its costs under control. According to Reuters, Darling has reported gross, operating, and net profit margins of 25.70%, 17.22%, and 8.10% respectively over the past year. Moreover, these numbers are above the industry averages of 4.39%, 1.54%, and 1.11% respectively. The numbers are also above or near the company’s five year average respective numbers of 23.69%, 8.67%, and 4.52%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor Dean Food’s respective operating and net income averages of 4.37, and 0.80%. The same comparison can be made for Corn Products and Hormel Foods. Therefore, Darling has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors.

Compiling all this information together and investors comes across ROE. Over the past year, Darling reported an ROE of 16.54%. Therefore, out of all shareholder equity, more than 17% (near five year average of 8.05%) come from earnings instead of debt or stock. This number is much stronger compared to the industry average of 1.12%, and the number is better than some competitor averages 1.41% (Dean Foods) and 7.22% (Corn Products). Therefore, Darling has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Darling cannot continue its success. The same logic applies to Darling’s 16.54% ROA (above industry average) and 20.77% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. Darling has a forward P/E ratio of 22.43 and a price to sales ratio of 1.81 compared to the industry’s respective 12.06 and 0.16, which shows a relatively overvalued status. In comparison, the rest of the market cap competitors have ratios that higher than Darling. Dean Foods has a forward price to earnings ratio of 26.63 and price to sales ratio of 0.23. What makes Darling’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as Darling. Darling can now be seen as both a growing and valued company. Moreover, Darling has a relatively low PEG (1.69) ratio compared to other competitors’ numbers as well.

Efficiency

Darling is efficient. Inventory turnover at 22.79 is strong compared to other industry market-cap rivals (Corn Products: 7.68). Moreover, asset turnover is also strong at 2.04 compared to competitor figures. Receivables turnover were at 13.74, but cash is not an issue for Darling. In terms of liquidation, Darling’s current ratio is at 1.34. This number is a bit risky, but the company’s capital expenditures have increased (3.32%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 92.48% of all Darling shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The dividend rate of 1.57% is also high.

Technical Analysis

Darling performed great in the past year. The company’s share price has increased 68.50% year-to-year. This type of growth is beautiful for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 11 dollar share price range dating back to late January 2008. The last time Darling reached this amount the company rebounded and appreciated 63%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Darling illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Darling according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Darling is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
July 11th, 2008