Quick Value 5.15.23 ($DAR)
Darling Ingredients - less than 8x EBITDA for a truly unique business
I cover plenty of cheap stocks with beaten up share prices or some kind of “ick” factor at play… this week, I’m looking at a higher quality business that’s performed well but stalled out recently… it could be at an interesting inflection point and likely worthy of a spot on your watchlist.
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Money supply vs. S&P 500 shows (from a thread by Yardeni Research on Twitter) the index has held up during the last 2 rounds of Fed tightening (with current round still underway)
Darling Ingredients ($DAR)
Darling Ingredients had a period of great performance and lately has leveled out trading more or less flat since 2021. I like these setups when fundamentals continue to improve while the share price treads water.
This is a pretty unique business and others out there are probably way more educated on what they do… At their core, Darling collects and renders animal by-products to repurpose them into all sorts of products like: collagen, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides. They do something similar with used cooking oils/animal fats. This is done through 155 production facilities in the US and another 74 facilities internationally. Per management: they “repurpose or process about 15% to 17% of the world's slaughtered animal byproducts” and each plant “
Everything via 3 segments: 1) Feed, which processes products to animal feed; 2) Food, which does food-grade products; and 3) Fuel, which makes biofuels through a joint venture with Valero.
The company’s 10-K filing gives a much more in-depth description of each business segment. There aren’t any public competitors with a similar business to all of Darling’s nor are there any scaled competitors privately.
Diamond Green Diesel…
Darling owns most of their operations with one exception in the Fuel segment where they own a 50/50 joint venture with Valero for processing renewable diesel fuel named Diamond Green Diesel.
This JV produced $350m equity income in 2021, $372m in 2022, and $94m in 1Q23 (+31% YoY). It’s a fast growing business with a very clean balance sheet.
DGD has not been making cash dividends to Darling/Valero anywhere near the current level of earnings; as they’ve been investing in plants and maintaining low leverage. That should start to turn the corner in 2023-2024 as major investments slow down.
Uses of cash are incredibly straightforward here — acquisitions and buybacks. I see 2 distinct periods of time in the cash flow statement:
2013-2020 — Levered acquisitions totaling ~$2.8bn when operating cash flow was <$300m; spent the following 6 years repaying debt on those acquisitions and growing cash flow.
2021-Present — Brief shift to buybacks (~$400m) followed by another string of large acquisitions.
Buybacks haven’t been meaningful but are certainly impactful. These aren’t just token buybacks offsetting dilution from stock comp either.
Future capital allocation looks like it will focus on deleveraging. At least for the remainder of 2023 and again in 2024 as they target 2.7x leverage by end of 2023 and an investment grade rating in 2024. They’re still making opportunistic stock buybacks at current levels with $44m repurchased in 1Q23.
Historically, Darling has been a 9-10x EBITDA stock and recently is trading below 8x. FCF is set to get a big boost from DGD dividends in coming years too.
Interesting note on valuation — Darling went through a period of flat stock returns and unchanged valuation from 2013-2019 as they continued to build up this DGD JV with Valero… since then, the valuation is unchanged (if not cheaper) while the stock has moved up alongside fundamentals. So the stock price is up over 10 years as fundamentals improve but valuation metrics are trending down… very interesting setup.
Summing it up…
Darling is an inexpensive stock with a unique and well protected business. There are facets of the business that are beyond the scope of these quick value write-ups but it’s worth reading about!
A cash flow engine in their DGD joint venture is about to start generating significant amounts of cash for deployment.
This one could be on the cusp of a very interest multi-year period…