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May 2010



Darling International - Fat Money

May 31, 2010 – Comments (7) | RELATED TICKERS: DAR

We were invited to a party at the home of an area "how do ma'am" last week. For those of you not from Texas, a "how do ma'am", is generally one of the folks that society has smiled upon but the world of money has not.

These folks think their business doesn't stink and that the wash room attendant is there to actually wash their hands for them, all for no tip of course.

It was pretty obvious to us that Ms. Augratin, our hostess, had invited us for some specific purpose, we just were a bit unclear as to what that purpose was as we were repeatedly asked to fetch someone a drink, or get the door, or help with the trash.

We took no offense at being treated this way, since we don't care for drinks with more than one ingredient, and only accepted the invitation so we could watch Ms. Augratin all but actually "do" her neighbor's home from college son, something we think she has wanted for quite some time.

Finally Mr. Head, whom we learned owned a fashion store for non-athletic cross-dressers, happened to ask us what business we were in. We replied that our business was investing, that we ran a blog site called Wax Ink, and that we sold investing worksheets via the internet, in addition to holding down actual jobs.

Snickers and giggles from the cheap seats filled the room of course, until finally Ms. Ipoot asked as she grinned broadly enough that everyone in the room could see the food stuck between her teeth, what green energy stocks we recommended.

Methane companies came to mind, but instead of saying what we were thinking, our response was the same as it always is, which is that we do not recommend stocks. We also explained that to us, every investment is an investment in green energy, since green is the color of money.

Ms. Ipoot didn't seem to care for our response, since the food stuck between her teeth let go about the time she started to make a snippy reply and was quickly transferred with a bit of spittle into the hair Ms. Augrtin, whose attention was so firmly clued on the crotch of Joe College, she never noticed the fly that had followed the food to her hair, and was at the moment probably marking its territory with a line of fly feces.

We did explain that we liked Darling International, Inc. (NYSE: DAR) for that sector and when asked what business they were in we said they were in a similar business to that of the fly in Ms. Augratin's hair, which brought out the question what was a fly doing in Ms. Augratin's hair?

Assuming that the question was directed at us, we just said that Ms. Ipoot had spat it there, but before we could add the words "by accident", pandemonium ensued. Seizing the moment, we decided then was a great time to take out the trash and just keep going. Which is exactly what we did.


Financial information related to Darling International, Inc., contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending January 02, 2010, as filed with the Securities and Exchange Commission on March 03, 2010.

What They Do

The company is a leading provider of rendering, recycling and recovery solutions to the nation’s food industry, collecting and recycling animal by-products and used cooking oil from food service establishments and providing grease trap cleaning services to many of the same establishments.

The company processes raw materials at 45 facilities located throughout the United States into finished products such as protein (primarily meat and bone meal, “MBM”), tallow (primarily bleachable fancy tallow, “BFT”), yellow grease (“YG”) and hides. These products are sold nationally and internationally, primarily to producers of livestock feed, oleo-chemicals, bio-fuels, soaps, pet foods and leather goods for use as ingredients in their products or for further processing.

During 1998, as part of an overall strategy to better commit financial resources, the company’s operations were organized into two segments, Rendering and Restaurant Services. The Rendering segment turns inedible food by-products from meat and poultry processors, butcher shops, grocery stores and food service establishments into high quality feed ingredients and fats for other industrial applications. This segment accounted for almost 77% of FY09 sales.

The Restaurant Services segment generates sales through grease collection and the sales of grease collection equipment in addition to expanding the line of other services the company provides, which includes grease trap servicing, and the National Service Center (“NSC”), a service offered to food service establishments and food processors. The NSC schedules services such as fat and bone and used cooking oil collection as well as trap cleaning for contracted customers using the company’s resources or third party providers.

The company was founded by the Swift meat packing interests and the Darling family in 1882, incorporating in Delaware in 1962 as the Darling-Delaware Company, Inc. In 1993 the company changed its name to Darling International Inc.

Short-Term Investment

The general movement of the stock price, at least to us, appears to be downward. But with that said, we notice that the stock has moved off its recent oversold condition and the MACD line appears to be bottoming out, leading us to wonder if now is not the right time to take a short-term position.

The stock closed recently at $8.00, with resistance at $8.98, a 12% increase from its recent close, and support at $7.99, which is for all intents and purposes, its recent closing price, making us wonder if now wouldn't be the best time to start a short-term position.

Long-Term (5 Year Hold) Investment

While the company's Current Ratio at 2.05, Quick Ratio at 1.60, Cash Ratio, at 0.96, and Return On Invested Capital at 39.44%, are all what we consider investment quality, there are other areas that we believe need improvement in order for a long-term investment to sustainable.

We would like to see Goodwill and Intangibles reduced. Currently these two items make up 28% of the company's Total Assets, which to us, is simply to high. We would also like to see an improvement in Free Cash Flow, an area that had been continuously improving until FY09.

One other area in which we would like to see improvement is the spread between Accounts Payable and Accounts Receivable. While the 16% of the company's Total Assets come from Cash on Hand, we believe an increase in the days payables are outstanding to something closer to 30 days from the current 15 days, would serve to bolster the company's cash on hand.

And with the current economic climate as weak as we believe it is, such an increase we believe would go a long way toward allowing the company to expand its business without the need to increase debt levels.


Based on our preliminary review of the company’s FY09 financial information, we think a Reasonable Value Estimate for the stock is in the $16 to $18 range, and that a reasonable entry target is in about $7.50.

Final Thoughts

The world of the small investor is often fraught with many twists and turns. Events that seem to be of little concern, many times create major market moves, reminding us that regardless how intently focused on the package hungry investors may be, there are times when the scent of fouled air can simply not be avoided.



To download the Darling International Raw Value Worksheet, please click here.  [more]



Kaiser Aluminum - Roll or Rolled

May 23, 2010 – Comments (2) | RELATED TICKERS: KALU , AA , A

There are 349 companies on our watch list from the Basic Industries Segment of the U.S. economy. Admittedly we have no clue what the vast majority of any of the 2600 companies on our watch list actually do.

What we do know is that every Saturday morning, we click a button and the weekly closing price for all 2600 companies, is updated, including the 349 in the Basic Industry Segment.

Just as we have no clue, about what all of the companies on our watch list actually do, we have no idea why the little voice that lives in all of the transistor radios in America decided that each quarterly earnings season should start with Alcoa, Inc. (NYSE: AA)? Why not Agilent Technologies, Inc. (NYSE: A), since the letter "A" is only used once in their ticker symbol.  [more]



Abercrombie and Fitch - The Art of the Thong

May 15, 2010 – Comments (2) | RELATED TICKERS: ANF

There was an on-line article several weeks ago, which quite frankly, we thought was a big lot of baloney. The article explained that consumer spending, supposedly 70% of economic activity, had surpassed it's pre-recession peak.

As we said, we think such a statement is big load of hot air, something a recent Gallup Poll seems to support.

So we were not at all surprised, given the news of recent weeks about consumer spending, to get several requests for our thoughts on T-shirt and thong retailer Abercrombie and Fitch Company (NYSE: ANF).


Financial information related to Abercrombie and Fitch Company, contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending January 30, 2010, as filed with the Securities and Exchange Commission on March 29, 2010.

What They Do

The and company is a specialty realtor that operates stores and direct-to-consumer operations selling casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids under the Abercrombie and Fitch, abercrombie kids, and Hollister brands.

In addition, the company operates stores and direct-to-consumer operations offering bras, underwear, personal care products, sleepwear and at-home products for women under the Gilly Hicks brand.

As of January 30, 2010, the Company operated 1,096 stores in North America, Europe and Asia.

In June 2009, the company's Board of Directors approved the closure of the Company’s 29 RUEHL branded stores and related direct-to-consumer operations. The determination to take this action was based on a comprehensive review and evaluation of the performance of the RUEHL branded stores and related direct-to-consumer operations, as well as the related real estate portfolio, and was completed during the fourth quarter of Fiscal 2009.

Short-Term Investment

The stock price is trending down, the problem at least to us, is that the time to have taken a short-term position was back in the first part of the month, although there are signs that is starting to change.

When we look for a short-term entry position, we like the Stochastic trend line to be in the oversold range and the short-term MACD trend lines starting to form a bottom. In the case of ANF, the MACD lines are favorable but the Stochastic lines are not.

In addition, should our short-term strategy not work to our advantage, we also want as large a delta between resistance and support as we can get. With a recent close at $40.22 and first resistance at $45.36 and first support at $37.03, the 5% positive delta is simply not enough for us to get to excited about a short-term trade at this time.

Long-Term (5 Year Hold) Investment

We admit that we were surprised with several of the metrics that we initially focus on, assuming that with the economic climate of the past 18 months or so, these metrics would not be to exciting. However, the company's Current Ratio at 2.79, Quick Ratio at 1.79, and Cash Ratio at 1.59, all impressed us.

The company's Total Debt per share of $1.25 was up about $0.11 year over year, but considering that the cost of money is fairly inexpensive, we considered the increase negligible.

We also noted a significant improvement in the company's receivables collections with a year over year decrease in Days Receivables outstanding of 43. This is a dramatic improvement and highlights at least to us, that management is exhibiting a strong entrepreneurial spirit.


Based on our review of the company’s FY10 financial information, we think a Reasonable Value Estimate for the stock is in the $56 to $61 range, and that a reasonable entry target is in the $25 to $30 range, an entry point supported by our Graham number of $32, and our Relative Value number of $43.

Final Thoughts

The company reported a decline in April of 7% for same store sales, something we assumed would be the case for all of FY10. However, having had an opportunity to take a short peek at the company's financials, we're not so sure that the stock price won't just weather the ongoing economic slump.

Certainly, the winds of change are becoming stronger and stronger, and it is our opinion that over the next several quarters, retailers in general are going to have some pretty tough times.

But if company management can continue to keep their collective heads in the game, the longer time outlook for the company should remain fairly positive, what with bikinis, T-shirts, and thongs, seeming never to go out of vogue.


To download the Wax Ink Abercrombie and Fitch Raw Value Worksheet, please click here.  [more]



Cubist Pharmaceutical - Acutely Aware

May 09, 2010 – Comments (2) | RELATED TICKERS: CBST.DL , ONTY.DL

We were asked last week why we never investigated biotechnology companies. To set the record straight, we own shares in a biotechnology company, Oncothyreon, Inc. (NASDAQ: ONTY), a clinical stage company developing cancer treatment therapies.  [more]



Hawk Corporation - Prey or Pray?

May 02, 2010 – Comments (0) | RELATED TICKERS: HWK.DL


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