Recycling for most of us is about plastic, paper and metal. Each week we put out our recyclables for collection, sending them to a plant somewhere where they melt them down for reuse in the future. Rarely do we think about all the other forms of recycling that exist in a world that clearly could be greener. For instance, what do we do with all the leftover animal parts in our food supply that are inedible? We render and recycle them into products for use in many different industries. What about all the grease created by fast food restaurants, where does it go? Good news, it too is recycled and reused. America recycles more than we think and Darling International (NYSE:DAR) is a big part of this movement. (For more about investing in sustainable businesses, check out Green Investing.)
100 Years And Counting
Founded in 1882 by Swift Meats and the Darling family, Darling International is based in Irving, Texas. For over 100 years, this company has helped the food industry dispose of its waste and by-products in a safe and environmentally friendly manner. Meat packers, processors and food stores create 50 billion pounds of inedible by-products annually according to Stevens Inc.'s June 4, 2008 investment conference. That's a huge amount of waste to dispose.
As a nation, we eat a lot of meat. In the first quarter of 2008 alone, the weekly amount of cattle slaughtered in the U.S. was 626,000 - which is an enormous amount of steaks and burgers. Darling takes the animal by-products left over from these slaughters and renders and recycles them. The tallow (cattle fat) is turned into a white, solid-like grease, used in soap, biofuels, pet food and livestock feed, and the meat and bones are made into hog food, poultry feed and pet food, and the hides are tanned into leather.
As for the restaurant grease, Darling turns that oily mess into animal feed and biofuels. (If you are looking for a pet-food business stock on the move, Del Monte Foods Company (NYSE:DLM) has seen an increase of 13.1% in the month of July - as of July 22, 2008.)
Dirty, But Profitable, Job
As they say in Entrepreneurship 101, to start a good business, you have to find a need and fill it. Darling is a shining example of that. It provides a sanitary and eco-friendly way for clients like McDonald's (NYSE:MCD), Caribou Coffee (Nasdaq:CBOU), Cosi Restaurants (Nasdaq:COSI) and Costco (Nasdaq:COST) to get rid of their animal by-products.
Darling International states that for every metric ton of carbon dioxide produced by one of its recycling centers, it takes seven tons from the environment. That's a much better solution than putting it all in landfills or burning it. The company has two business segments: Rendering and Restaurant Services. The two divisions combined to generate $645 million in revenues in 2007, along with operating income of $80.65 million.
Consistency Created Cash
All Darling does is grow, taking revenues from $323.27 million in fiscal 2003 to $645.31 million at the end of 2007. Operating income in the same time-period went from $27.16 million in 2003 to $80.65 million in 2007 and operating margins raised 400 basis points from 8.4% to 12.4%. In 2008's Q1 sales were $202 million, up 45.7% or $63.4 million. Higher prices and increased volume of raw materials accounted for most of the growth. Operating income increased $18.12 million to $35.17 million, an increase of 106% from the same quarter a year ago. Not only does it keep growing, it does so while allocating only $0.15 in capital expenditures for every $1 in adjusted EBITDA. That's money well spent.
The Future's Outlook
It's clear that while Darling is growing slowly, biofuels could move it into a new growth stratosphere. The U.S. consumes 18% of the world's diesel fuel and Europe 28%. Because these engines are easily converted to burn biofuel instead of diesel, Darling is in position to reap the rewards of a worldwide move to biofuels.
In addition, remember all that beef we're eating? Well, animal fats and greases are the lowest cost feedstock in the world - and Darling is producing them!According to the National Renderers Association, Darling provides 13% of all the fats and greases in the U.S.
However, analysts are unsure about the future in this sector. Avondale cut its rating to "Market Perform" from "Market Outperform" four days after Darling announced its first quarter earnings, citing a fair price as the reason for the cut. Although the biofuels business will add to its growth, Avondale felt it was too early to build this into the stock, maintaining a $15.50 target price. Another analyst, Farha Aslam, from Stephens Inc. raised the target price two bucks to $19 due to expected Q1 EPS of $0.21. The company did $0.26. Its stock is up 66% in the last 52-weeks compared with a negative 16% for the S&P 500. You can't blame analysts for thinking it is fully priced. (For more on biofuels, check out The Biofuels Debate Heats Up.)
There's a lot to like about Darling. It's well run,and profitable, and its providing a beneficial service to the world. Even though the stock has appreciated a great deal in the past year, I believe it has a lot of room to run, especially if it becomes a big player in the biofuels business. My only problem with Darling is its investor relations are terrible - just try getting documents from their website! You'll have to supply them with an email to do so. I had to supply mine twice. That's totally unacceptable for any company. Caveat emptor - Let the buyers beware!
Don't take every company at its "green" word. To learn more see The Green Marketing Machine.