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Darling International - Fat Money

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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.

Basis

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.

Valuations

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.

Wax


Worksheet

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

7 Comments – Post Your Own

#1) On May 31, 2010 at 9:50 PM, ChrisGraley (29.89) wrote:

You should have told them what I told a similar personality type mother to a girl I was dating in my early 20's that decided that I wasn't good enough before I walked in the door.

I told her that I had an extremely large pecker and that I made a comfortable living pulling it out and showing it to people at carnivals.  

 

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#2) On June 01, 2010 at 4:08 AM, wax (97.14) wrote:

Ahhhh yes....the new ring master. Thanx for the laugh Chris!

Wax

 

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#3) On June 01, 2010 at 8:01 PM, Teacherman1 (57.31) wrote:

An interesting way to introduce your thoughts on DAR.

I have been watching this for some time and have it in my Limit Orders at $6.50.

I think if they can get some things worked out, they may be a good long term growth stock. 

JMO and worth exactly what I am charging for it. 

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#4) On June 01, 2010 at 8:01 PM, Teacherman1 (57.31) wrote:

An interesting way to introduce your thoughts on DAR.

I have been watching this for some time and have it in my Limit Orders at $6.50.

I think if they can get some things worked out, they may be a good long term growth stock. 

JMO and worth exactly what I am charging for it. 

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#5) On June 02, 2010 at 1:58 AM, Tastylunch (29.28) wrote:

Thanks Wax!

loved the story.

I'm a former Darling investor. Still like the company but it never seems to reach its's potential.

The whole eco fuel thing using their grease trappings hasn't seemed to do much for them yet.

I wish they'd get this puppy convincingly above ten dollars. It's low share price really limits the institutional support it could get.

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#6) On June 02, 2010 at 4:16 AM, wax (97.14) wrote:

Teach and Tasty;

We had DAR in the portfolio, adding it in mid 2005 at a bit under $4. In mid 2008, we closed our position with the stock price at almost $15.50.

The reason we closed our position was because we believed the housing bubble was bursting and we simply didn't want to keep DAR through the coming downturn, believing that we would be able to buy it back when the economy straightened out, at a price considerably less than where we sold.

The other reason was exactly as you point out Tasty, the stock price simply isn't enough to get institutional investors interested. As a result, there is little analyst coverage.

We presented DAR because of the recent BP fiasco.

One of the interesting things science was working on before the economoy went to hell in a handbasket, was alternative fuel sources, specifically biodiesel which was the reason the stock price ran up a couple of years ago.

And in the world of investing, history seems to repeat itself...often.

Wax

 

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#7) On July 04, 2010 at 9:58 AM, mkyorai (87.00) wrote:

Great intro.  I think I know some of those people...

One question I did have reading through the quarterly report: they seem to make relatively extensive use of swap agreements and other derivitives in order to hedge commodity prices.  I'm just curious, from more experienced investors out there... how "normal" is this, exactly?  I'm thinking specifically of Sadia, the brazilian poultry concern (and former HG pick) which nearly blew itself up in bad hedging picks.  I generally like the financials on DAR, although I agree with Tasty that it never seems like they actually achieve what they should be capable of.  So far, anyway...

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