Value Line has initiated coverage of Darling International, Inc. (DAR) in its flagship product, The Value Line Investment Survey. The company is a leading provider of rendering used cooking oil, bakery residual recycling, and recovery solutions to the nation's food industry. It collects and recycles animal by-products, bakery residual, and used cooking oil from poultry and meat processors, commercial bakeries, grocery stores, butcher shops, and food service establishments, while providing grease trap cleaning services to many of the same establishments.
In addition, Darling operates over 120 processing and transfer facilities located throughout the United States. These locations are designed to process raw materials into finished products such as protein, primarily meat and bone meal, poultry, hides, fats, poultry grease, yellow grease, bakery by-products, and a range of branded and value-added products. The business sells these items both domestically and internationally. Its core customers are producers of animal feed, pet food, fertilizer, bio-fuels, and other consumer & industrial ingredients, which include oleo-chemicals, as well as soaps and leather goods for use as ingredients in their products or for further processing.
It appears as though the most challenging aspect of the business is the procurement of raw materials, rather than the sale of finished products. Pronounced consolidation within the meat processing industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize "captive" renderers (rendering operations integrated with the meat or poultry packing operation). Simultaneously, the number of small meat processors, which have historically been a dependable source of supply for non-captive renderers, has decreased considerably. Slaughter rates in the meat processing sector are subject to decline due to economic conditions. Thus, the availability, quantity, and quality of raw materials available to the independent businesses shrinks. These factors have been offset, in part, by increasing environmental consciousness. The need for food service establishments to comply with federal regulations, concerning the proper disposal of used restaurant cooking oil, should continue to provide a growth area for this raw material source. The rendering industry is highly fragmented and very competitive. Darling competes with other rendering, restaurant services, and bakery residual businesses. What’s more, it squares off against peers with respect to alternative methods in the disposal of animal processing by-products and used restaurant cooking oil provided by trash haulers, waste management companies, and bio-diesel companies. In addition, food service establishments have increasingly experienced theft of used cooking oil. A number of DAR's competitors for the procurement of raw material are experienced, well-capitalized companies that have significant operating leverage and historic supplier relationships. Too, competition for raw materials is based primarily on price and proximity to the supplier.
In marketing its finished products globally, the company faces competition from various processors and producers of other suitable commodities. Tallows and greases are, in certain instances, substitutes for soybean oil, inedible corn oil and palm oils. Bakery feed is a substitute for corn in animal feed. Consequently, the prices of the aforementioned goods correlate with these substitute commodities. Furthermore, it should be noted that the markets for finished products are impacted mainly by the worldwide supply of and demand for fats, oils, proteins and grains.
Shares of Darling International have been trading close to their all-time high of $21, which is roughly four times that of its IPO in August of 1994. However, the upward trek has been anything but smooth. This is largely attributable to the company’s uneven earnings growth. That said, it is most likely the swelling bottom line that has provided the stock with solid momentum. Although Darling’s industry packs a substantial amount of inherent risk, its prospects seem promising. Indeed, a host of bolt-on value added acquisitions ought to bolster the top and bottom lines ahead.
Subscribers interested in this recycling services provider are advised to consult Value Line’s quarterly reports for Darling International, Inc., as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.