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Darling International - Fat Money

May 31, 2010 | About:
Wax

wax

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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.

About the author:

wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

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