Darling Ingredients: At the Margin

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by Debra Fiakas CFA

This week Darling Ingredients (DAR:  NYSE) reported earnings of $100,000 on net sales of $874.7 million in the first quarter ending March 2015.  Darling is a recycler of sorts, collecting by-products of the food production industry and recycling the left-overs and waste into proteins, fats and leathers.  Nothing goes to waste.  Every last chicken feather, hide, gallon of used cooking grease and cake crumb gets up-cycled to a usable material for feed, food, fuel or clothing.  Its customers include pet food producers, personal care manufacturers and textile users, among others.

Darling used to sell its non-edible oils to the biofuel industry until it entered into a joint venture called Diamond Green Diesel with oil and gas giant Valero Energy, Inc. (VLO:  NYSE).  The joint venture provides a good hedge for Darling against declines in the prices for its oil, which can weaken against other oils from corn, soy or palm crops.   Diamond Green produced 37 million gallons of renewable diesel in the quarter.

The commodities business is a tough one and Darling had been under some pressure in recently months from weakened selling prices.  Sales in the three months ending March 2015, slipped compared to the year-ago quarter on lower selling prices for fat products.  The strong dollar also trimmed reported sales.   Management seems to have righted the ship with a cost cutting program and restructuring in some divisions.  The company also has some protection if raw materials prices increase  through sales contract include provisions for selling price adjustments.    During the earnings conference call management characterized margins in the feed segment as ‘normalizing’ and in the food segment ‘stable’ following restructuring efforts.

The breakeven earnings results were better than analyst expectations for the quarter and offered encouraging evidence that management had regained control of margins.   On a non-GAAP basis Darling generated $0.09 in earnings per share after excluding acquisition and integration costs and amortization.  This compares to the consensus estimate of non-GAAP earnings of $0.06 per share.  The appearance of an upside surprise was enough to bring investors and traders back to DAR, which gapped higher in the first day of trading following the earnings release.

Crystal Equity Research has a Buy rating on DAR.  The stock appears overbought in the short term, but management’s efforts to regain profit margins have borne fruit and the stock looks interesting for investors with a long-term horizon.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy rating on DAR and Darling Ingredients is included in the Biofuel Group of the Beach Boys Index of alternative energy developers and producers.


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