DAR - Darling International

[Palantir]

This is a firm I'm beginning due diligence on, and if I have the right idea, I'll post a writeup on this.

 

Basically this firm is in the rendering business. What they do is they take meat, bones, and fat from places like slaughterhouses, restaurants, and bakeries and turn them into things like meal, animal feed, and soaps. Recently they've entered into an agreement to build a biofuels plant, which could be an interesting prospect in the future.

 

What this firm I feel has going for it is that it is the largest player in an non growing industry, it's not a very attractive industry, and likely quite repulsive, but necessary. It's not at risk of technological obsolescence, so I feel that if they stay profitable and you can get in at a good price, it could be a good investment.

 

The difficulty is in determining that price. The firm bought Griffin industries, which was largely responsible for the dramatic growth in sales. I see that as a strength, as it consolidates the industry. The firm has a changing capital structure, which makes analysis a little troublesome.

 

 

Interested in hearing thoughts on this firm.

[twacowfca]

Warren Buffett tells a story.  When he was a child his father would sometimes take him to the country club where he saw a man who was the best dressed man in town who drove the most expensive car and vacationed in far away places, traveling first class.

 

"What does that man do?"  Warren asked his father.

 

"Why, he renders horses", his father replied.

 

"What's that?"  Warren wanted to know.

 

"When a horse dies in a field, the farmer will call up that man and pay him a few dollars to com out to the field in his truck to hoist the dead horse up and carry it away to dispose of it in his rendering plant", Warren's father explained.

 

;D

[Charlie]

There is an important business lesson in this funny story:

 

Whenever you have a business with a big disincentive of doing, it´s likely very profitable.  :)

 

That´s probably the reason why i´m always in these kind of business that´s like rendering horses.  ;D

[twacowfca]

There is an important business lesson in this funny story:

 

Whenever you have a business with a big disincentive of doing, it´s likely very profitable.  :)

 

That´s probably the reason why i´m always in these kind of business that´s like rendering horses.  ;D

 

 

When I was a child, we lived in a small town.  One of the best dressed men in town who drove a big Cadillac was the man who was the town mortician.

 

:)

 

Just curious.  Does the same phenomenon of paradoxical wealth associated with disagreeable occupations occur  in other countries?  In more socialistic countries?  Or poorer countries?

 

Another question:  Among our family and friends, and generally in the town where we grew up, the most respected people were those with admirable qualities, not generally those with the greatest wealth.  The more considerate or more discerning or those who combined intelligence with high education were the most respected.  Those who were wealthy, but did not have these qualities were generally viewed more as deficient to be pitied than hated.  While those who were poor were viewed with compassion unless they had perceived moral deficiencies.  In that case the dissolute, whether poor or not, were viewed sometime with compassion, but often with as much distain as those who were rich, but didn't meet the expectations of charity and mercy and generosity that should go with wealth.

 

This sounds like an old episode of "The Walton's", but that's the way it really was growing up in small town America. 

 

How was it growing up in other countries?

 

[Palantir]

It is not always necessary that people in that business will be wealthy. They may also be slaves, low castes, unwelcome minorities etc. I know that in India people known as "untouchables" used to handle dead animals, skinning dead animals, and sewage.

[Williams406]

"Dutch Chicago" by Robert Swierenga, contains a chapter about the Chicago Dutch waste haulers. It's been a few years since I read it, but if memory serves, few immigrants in the late 1800's were willing to accept the early mornings, long days, and filth of trash collection. Not so for the Dutch. They came to dominate the industry in Chicago to such a degree that when the mafia tried to break in to the industry in the mid 1900's, they were unsuccessful. Wayne Huizenga, Waste Management, Republic Services, and the former Allied Waste all had roots with Chicago waste haulers. 

[eclecticvalue]

I have looked into this company. So it does have a monopoly in United States but I am hard pressed about the business growing any further in U.S. Also the meat industry has been consolidating with a few of the meat producers gone bankrupt which would affect darling. There is international expansion but I haven't seen much progress on that front.

[ColdCapital]

This is an interesting looking company. The stable rendering operation should provide a "floor" for value and the DGD plant could make good money.

 

From what I have read, people estimate ~$0.30/sh of incremental EPS from the DGD operation. It's not as cheap as when you first posted, but the latest CC was very positive. And they either invest their cash or return it to shareholders.

 

Did you make a decision regarding Darling?

[Palantir]

Yeah.....I'm still undecided on this one. I like the stable, boring nature of the business, and it seems moderately priced, but I'm worried by management's capital allocation in the past (like that one major dilution to buy Griffin, although the cash generating ability has gone up dramatically), and I'm not sure if there's a catalyst on the horizon - although their plants run on NatGas - so cheap NG is good.

 

Since the business is slow growing, can't exactly put a generous multiple on it, so to me, it's not an obvious buy....but maybe if it drops more it could be. I've basically ignored the biodiesel venture, as I can't really project CF's from that. [/rambling]

 

Do you have any particular directional opinion on this? This may well be worth a deeper revisit.

[Guest wellmont]

There is an important business lesson in this funny story:

 

Whenever you have a business with a big disincentive of doing, it´s likely very profitable.  :)

 

That´s probably the reason why i´m always in these kind of business that´s like rendering horses.  ;D

 

i think warren and charlie made this point. when asked what kind of business to start they said think of something that's hard to do and other people don't want to do it...

[ColdCapital]

Palantir -

 

I have no deeper feel on this one other than it looked interesting on the first cut. As I mentioned, the conf call sounded good, but I haven't listened to enough of these to "calibrate" to management's style.

 

An Investor Package is "in the mail"... I will come back if I find anything interesting. It's a surprisingly complicated niche!

 

Thanks.

[DTEJD1997]

Hey all:

 

I hate to be "downer", but this one has been perpetually cheap.

 

I remember thinking many of the same thoughts that are being expressed here....back when I first got started, the very early 90's.

 

The only difference was that I think I was looking at their junk bonds which were trading at a huge discount, maybe .60 on the dollar.  Would have been a good buy at the time....Never did do anything with it though.

 

I think they also went bankrupt in the early 2000's?  Too much debt.

 

Didn't they also get into a "beef"  ;D with "grease rustlers"?  These freestyle bandits would own a suction truck and then go collect on Darling's routes.  Is an $8/hr. fast food employee even going to notice that the wrong company is suctioning out the grease traps at 2 am?  haha  NO    Hard to believe people would steal grease & gristle, but they did....

 

Maybe it is different this time, but I think this industry is prone to mediocre returns...

[jch548]

Just yeaterday I was trying to remember this company's name. I was looking at Sudzucker in Germany. They are europes largest sugar processor. Interesting company with very little debt.

 

http://www.suedzucker.de/en/Homepage/

 

They also have a biofuel business or ethanol from sugar. Europe wants to move to more renewable biofuels instead of crop based and DAR would fit the bill. Take a look at their presentations for some details on this. Is DAR in Europe?

 

Profits at Sudzucker have really grown but they recently stated year ahead profits won't be as robust as the year just passed. They do sugar processing, single serving food packets such as sugar or maybe ketchup etc, europes largest frozrn pizza maker, fruit processing and biofuels which I believe is their second largest profit generator.

 

Probably a stock to buy and forget about. They have done a number of small acquisitions and seem to be constantly building new plants etc. Just kinda wondering when they will again be on a profit upswing.

[constructive]

Hey all:

 

I hate to be "downer", but this one has been perpetually cheap.

 

I remember thinking many of the same thoughts that are being expressed here....back when I first got started, the very early 90's.

 

The only difference was that I think I was looking at their junk bonds which were trading at a huge discount, maybe .60 on the dollar.  Would have been a good buy at the time....Never did do anything with it though.

 

I think they also went bankrupt in the early 2000's?  Too much debt.

 

Didn't they also get into a "beef"  ;D with "grease rustlers"?  These freestyle bandits would own a suction truck and then go collect on Darling's routes.  Is an $8/hr. fast food employee even going to notice that the wrong company is suctioning out the grease traps at 2 am?  haha  NO    Hard to believe people would steal grease & gristle, but they did....

 

Maybe it is different this time, but I think this industry is prone to mediocre returns...

 

They were in trouble in the late 90s / early 2000s, but since then results have been anything but mediocre.

 

http://media.ycharts.com/charts/16161534b331ed8c22da6c9ddc5bf192.png

 

[constructive]

http://money.cnn.com/2009/09/22/pf/darling_international.fortune/

Darling nearly went bankrupt earlier this decade after the 1996 farm bill -- dubbed the Freedom to Farm Act -- cut government subsidies and allowed farmers to plant as much corn and soybeans as they could. The price of a bushel of corn fell 65% from 1996 to 2000, wiping out Darling's profits as livestock farmers bought corn instead of Darling's feed.

 

"The model was broke," says Stuewe. Darling reworked customer contracts to protect its margins from commodity dips, and then "we looked at the company and said, 'We ought to re-brand as a green company.' And frankly we got the trend right."

 

http://www.wikinvest.com/stock/Darling_International_(DAR)

Darling International faced bankruptcy at one point [2003] and a group of 6 banks acquired a 3/4 equity position in the company in exchange for a $163m line of credit.

 

Now rated one notch below investment grade. Given interest coverage and debt to equity it could easily be upgraded further.

 

http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=DAR&Country=USA

[ColdCapital]

OK, I have completed the Investor Package reviews and cannot get comfortable with putting a value on the company. Other posters have already highlighted the major issues: some sort of financial distress every 10 years, theft, commodity exposure (eg, high corn prices help lift selling prices, but hurt cattle production), consolidating suppliers who now "in-house" DAR's services, mediocre historical returns. Per the recent conference call, it looks like the bio-diesel JV will add ~$0.40/sh to eps.

 

I guess the Bull Case is the "un-priced-in" JV earnings. Might be a trade, but I'd prefer it in distress.

 

Thanks for all the replies.

[constructive]

OK, I have completed the Investor Package reviews and cannot get comfortable with putting a value on the company. Other posters have already highlighted the major issues: some sort of financial distress every 10 years, theft, commodity exposure (eg, high corn prices help lift selling prices, but hurt cattle production), consolidating suppliers who now "in-house" DAR's services, mediocre historical returns. Per the recent conference call, it looks like the bio-diesel JV will add ~$0.40/sh to eps.

 

I guess the Bull Case is the "un-priced-in" JV earnings. Might be a trade, but I'd prefer it in distress.

 

Thanks for all the replies.

 

I agree with you that valuation could be better, but disagree with some of those comments.

 

1. Theft doesn't seem to be a major issue now, just an anecdote.

2. Since 2003 they've derisked the business in several ways - hedging their commodity exposure, strengthening the balance sheet, and moving up the value chain (biodiesel being one example).

3. They've been a bigger consolidator than any of their competitors, reducing competitive pressure.

4. They've roughly broken even with the market over the last 20 years and crushed it over the last 10 years.

 

Overall I think it's a high quality company at a fair price and have a small position.

[ColdCapital]

Constructive -

 

You could very easily be correct on this one.

 

If the diesel works as predicted and the business rebounds from last year, $350m in EBIT seems plausible. And EV is $2.5b? Not crazy by any means. I'm not sure how to think of the terminals and other smaller bits.

 

If they "bleed" the JV earnings in so it looks like growth, maybe a big p/e will result.

 

On "returns", I meant ROAs (but didn't specify). You're correct on the stock performance.

 

Maybe I'll check option prices...

[constructive]

Yes, that's true. ROA, ROE, etc. are lower than I usually like. ROE has trended down partly because of deleveraging, which doesn't appear necessary any more.  We'll see how earnings and other metrics look in the next few quarters.

[BG2008]

From my youth, we had these metal containers where we dump our waste cooking oil (think Mikey D's french fries fryer grease).  In the 90's, these services were free.  The companies put a container in the back of our restaurant and a truck came every once in a while and sucked the grease out of the container.  Then slowly, these companies no longer wanted the waste grease.  We needed to pay someone to haul them away.  In the 90's and early 2000, we would get a monthly bill of $50-$125 for the grease removal.  The company was MOPAC (a meat packing company).  I believe the explanation for the Darling International's under performance in the 90s was actually a function of crude oil prices.  Waste cooking oil/fat was used to make soap (yeah, nasty if you think about it).  But oil got so cheap in the 90's, the soap companies switched to crude oil derivatives and the rendering guys essentially had no buyer for their products and hence no incentive to pick up the oil/fat and start charging people for a fee.  We sold our restaurant back in 2003.  By the way, I was a teenager back in the 90s, the rationale given here is bestowed from other restaurant owners.  So, take it with a grain of salt. But, it does make sense to me. 

 

I'm speculating that since 2003, when oil went on its run, the soap makers probably started using waste oil/fat to make soap again.  With higher crude prices, Darling can probably sell into the bio-diesel space as well.  I would say that Darling International's ability to make a buck is tied to crude oil prices a lot more than people think. 

[Chalk bag]

Stock came off. Interest had been perking up. Had anyone been doing work on the name and want to discuss?

[spartansaver]

Well from what I gathered through a quick look-through of the 10-k their products compete with various food oils ex. soybean that are depressed along with oil. Add to the fact they have taken on a boatload of debt in the past few years and the situation doesn't look so great.

[Chalk bag]

Well from what I gathered through a quick look-through of the 10-k their products compete with various food oils ex. soybean that are depressed along with oil. Add to the fact they have taken on a boatload of debt in the past few years and the situation doesn't look so great.

 

Spartansaver - I agree with you. The strip isn't getting better and the move to vertically-integrate itself to tie to oil certainly didn't help. You would have to think while they are suffering, their competitors are literally going BK tho. This is a really a scale business and I'm seeing DAR being a waste management + value-added product hybrid. Commodities aside it seems like a pretty good business at troughy earnings to me. Probably goes to $7-8 before it goes to $30-40 in 3-5 years.

[Chalk bag]

Well from what I gathered through a quick look-through of the 10-k their products compete with various food oils ex. soybean that are depressed along with oil. Add to the fact they have taken on a boatload of debt in the past few years and the situation doesn't look so great.

 

Spartansaver - I agree with you. The strip isn't getting better and the move to vertically-integrate itself to tie to oil certainly didn't help. You would have to think while they are suffering, their competitors are literally going BK tho. This is a really a scale business and I'm seeing DAR being a waste management + value-added product hybrid. Commodities aside it seems like a pretty good business at troughy earnings to me. Probably goes to $7-8 before it goes to $30-40 in 3-5 years.

 

Well, there we are. Quarter is coming up. No position. Anyone got additional insight?

[ander]

~75% of EBITDA is on formula contracts and is well-insulated relative to the steep underlying commodity price declines (as evidenced by the EBITDA QoQ past couple of quarters) adjusting for currency.  Of course they are impacted by the portion that is not on formula contracts - I would expect Q4 (this upcoming quarter) is probably the low point or very close to it (of course currencies can get worse, but commodity prices are getting to be uneconomical to produce and DAR has several plants coming online that will also add to EBITDA).  CFO has returned and is extremely prudent - he will be lowering the total leverage and will then become more aggressive re: share buybacks as they have stated on conference calls.  I agree with your upside potential in the coming years is several multiples from here.  In terms of short-term price moves, the resilience of the "new" DAR with formula contracts is overlooked and it trades with highly cyclical commodity, energy, industrial cos.  Even companies like GPRE which are focused on ethanol is the wrong comp.  Previous posts are correct that the business was a mess before Randall Stuewe (CEO) took over.  See article below.

 

http://www.dmagazine.com/publications/d-ceo/2014/september/how-darling-ingredients-is-greasing-the-competition