Darling Ingredients Inc Fundamental Analysis
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Darling Ingredients Inc
Last Updated: 19 Aug 2023
NYSE: DAR
GICS Sector: Consumer Defensive
Sub-Industry: Packaged Foods
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Table of Contents
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Management
CEO: Randy Stuewe
Tenure: 20.5 years
Darling Ingredients Inc.'s management team has an average tenure of 2.0 years. It is considered experienced.
Source of Revenue
Darling Ingredients Inc is a global producer of sustainable natural ingredients from edible and inedible bio-nutrients. The company's diverse products serve customers in the pharmaceutical, food, pet food, animal feed, industrial, fuel, bioenergy, and fertilizer industries. Operating on five continents, Darling Ingredients Inc converts animal by-products into valuable ingredients like collagen, fats, proteins, meals, plasma, and more. Its offerings include organic fertilizers, yellow grease, fuel feedstocks, green energy, and natural casings. The company also recycles oils into feed ingredients, process bakery products, and offer environmental services like grease trap collection.
Darling Ingredients Inc operates within three reportable operating segments: Feed Ingredients, Food Ingredients and Fuel Ingredients.
Feed Ingredients
The Feed Ingredients operating segment encompasses the global operations of a company involved in various activities. These activities include collecting and processing animal by-products like beef, poultry, and pork into non-food oils and protein meals across North America, Europe, and South America. The segment also involves collecting bakery residuals to create Cookie Meal®, primarily used in poultry and swine diets. Other processes involve converting used cooking oil into non-food fats, processing porcine and bovine blood into blood plasma powder and haemoglobin, and producing meat products for pet food. The segment also includes processing cattle hides and hog skins, producing organic fertilizers from animal by-products, rearing black soldier fly larvae for speciality proteins in animal feed, and providing grease trap services to food establishments. The resulting products, such as oils, fats, protein meals, and blood plasma powder, are used as ingredients in animal feed, pet food, and other applications like biodiesel, renewable diesel, and industrial uses.
Food Ingredients
The Food Ingredients operating segment of the company engages in a range of global activities. These include the purchase and processing of materials like beef and pork bone chips, beef hides, pig skins, and fish skins to create collagen across Europe, China, South America, and North America. Additionally, the segment involves collecting and processing porcine and bovine intestines into natural casings in Europe, China, and North America, as well as extracting and processing porcine mucosa into crude heparin in Europe. The company also collects and refines animal fat into food-grade fat in Europe and processes bones into bone chips for the collagen industry and bone ash in Europe. The resulting collagens find application in various industries such as pharmaceuticals, nutraceuticals, food, pet food, and technical uses. Moreover, the natural casings produced are sold as ingredients for the production of sausages and similar food items by third-party customers.
Fuel Ingredients
The Fuel Ingredients operating segment covers global activities of the company involving its equity investment with Valero Energy Corporation in Diamond Green Diesel Holdings LLC. This joint venture aims to convert various feedstocks like animal fats, used cooking oil, and others into renewable diesel. The segment also includes processes like converting organic waste into biogas in Europe, transforming fallen stock and animal by-products into low-grade energy sources for industrial use in compliance with EU regulations, and processing manure into natural bio-phosphate in Europe.
Darling Ingredients Inc sells finished products primarily through commodity trading departments. In North America, trading is managed from Texas, Kentucky, and Virginia, while Darling Ingredients International's sales are managed from the Netherlands and various offices worldwide. The company coordinates international sales of common products for efficiency. Their sales force communicates with customers daily to manage sales and distribution. Finished products are sold directly or through brokers and agents. Various products are marketed under different brand names. These products serve industries including animal feed, pet food, biofuel, and more. Premium and branded products command higher prices due to enhanced nutritional content. Payment protection for global sales is ensured via bank letters of credit or cash. Darling Ingredients Inc monitors market conditions and implements measures in response to changes. Finished products are shipped shortly after production, with limited inventories to reduce exposure to price fluctuations. The company operates its own fleet and utilizes third-party freight companies for logistics.
Darling Ingredients Inc Reportable Segment Revenue FY2022
Darling Ingredients Inc Revenue Geographic Breakdown FY2022
Darling Ingredients Inc Economic Moat
Darling Ingredients Inc Economic Moat
Economic Moat: Narrow
There are many ways to identify Darling Ingredients Inc’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Darling Ingredients Inc. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Darling Ingredients Inc’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Yes.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Yes.
Is the free cash flow positive for the past 5 years? No.
Is the gross margin % consistent/ growing for the past 5 years? Yes
Is the EPS growing for the past 5 years? Yes.
Darling Ingredients Inc Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Yes.
Darling Ingredients Inc FCF per Share
Management Effectiveness
Is Darling Ingredients Inc’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Darling Ingredients Inc Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? No.
Darling Ingredients Inc Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
Darling Ingredients Inc Shares Outstanding (Million Shares)
Darling Ingredients Inc Financial Health
Darling Ingredients Inc Financial Health (USD Million)
Current Ratio: 1.85 (pass my requirement of >1.0)
Debt-to-EBITDA: 2.96 (barely pass my requirement of <3.0)
Interest Coverage: 3.04 (barely pass my requirement of >3.0)
Debt Servicing Ratio: 10.6% (pass my requirement of <30.0%)
Dividend
Darling Ingredients Inc does not have a record of paying a dividend.
Darling Ingredients Inc Stock Performance
The table below compares the change in the cumulative total stockholder return on Darling Ingredients Inc's common stock with the cumulative total return of the Russell 2000 Index and the Dow Jones US Waste and Disposal Service Index for the period from 30 December 2017 to 31 December 2022, assuming the investment of $100 on 30 December 2017 and the reinvestment of dividends.
Darling Ingredients Inc Stock Performance
Darling Ingredients Inc Intrinsic Valuation
Estimated intrinsic value: $17.76
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$420M
Projected growth rate: 7% - 9%
Beta: 1.2
Discount rate: 9.0%
Margin of safety: 50% (Uncertainty: High)
Price range after the margin of safety: <$9.00
Date of calculation: 18 Aug 2023
Darling Ingredients Inc Valuation
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Darling Ingredients Inc Intrinsic Valuation
Darling Ingredients Inc Relative Valuation
Darling Ingredients Inc EV-to-EBITDA vs its peers
Darling Ingredients Inc Price-Earnings Ratio vs its peers
Darling Ingredients Inc Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
Darling Ingredients Inc is confronted with significant risks of market price volatility across its various segments. Within the Feed Ingredients segment, the prices of commodity products are subject to influence from global factors such as supply, demand, policies, and weather conditions. These factors can substantially impact the company's operations and cash flow. Furthermore, abrupt price fluctuations in finished goods directly affect the gross margin.
Moving on to the Food Ingredients segment, which involves longer processing times, the company is particularly sensitive to shifts in prices during the production phase. The Fuel Ingredients segment is not exempt from risk either, as it faces the challenges of energy price fluctuations and competition from alternative feedstock sources.
In addition to these challenges, the company encounters difficulties in procuring raw materials. These challenges arise due to industry consolidation, reduced slaughter rates during economic downturns, heightened competition for used cooking oil, and the potential impact of economic downturns on the availability of suppliers.
Darling Ingredients Inc operates in a fragmented rendering industry, facing competition from various methods of animal by-product disposal. The fees associated with collecting raw materials and the revenue generated could experience a decline if suppliers opt for alternative disposal methods. Furthermore, the scarcity of truck drivers also affects the efficient transportation of raw materials.
The company's contracts for raw materials, based on established formulas, particularly in the US, offer the flexibility of cost adjustments in response to changes in finished product prices. However, any changes or the inability to renew these contracts could have an adverse effect on the company's overall business operations.
Lastly, a significant portion of Darling Ingredient's revenue is derived from a small number of suppliers and customers. Specifically, in the fiscal year 2022, approximately 40% of product sales were attributed to the top ten customers, while the top ten raw material suppliers accounted for about 26% of raw materials. Consequently, any disruptions, alterations, or terminations in relationships with these major suppliers or customers, or their financial hardships that lead to operational cutbacks or closures, could result in substantial financial losses and materially impact the company's business performance, earnings, financial standing, and cash flows.
Summary for Darling Ingredients Inc
Darling Ingredients Inc's economic moat arises from its intangible assets, including brand recognition, technology, and innovation.
With a history spanning over a century, Darling Ingredients has cultivated a robust reputation for quality and dependability. Its products cater to a diverse clientele, encompassing food manufacturers, pharmaceutical firms, and pet food producers.
For example, Rousselot, a prominent manufacturer of gelatin and collagen products, boasts a strong standing for quality. These products find utility across various sectors, including food, pharmaceuticals, and cosmetics. Similarly, Sonac holds a leading position in producing feed-grade fats and meals. These products enhance the nutritional value of animal feed. Additionally, Sonac offers a range of other items like yellow grease and natural casings.
Establishing a formidable brand and reputation within the sustainable ingredients sector cultivates customer loyalty and trust. This, in turn, delivers a competitive advantage, making it arduous for rivals to secure market share solely based on pricing.
To develop such offerings, Darling Ingredients heavily invests in research and development. The company harnesses proprietary technologies and processes to convert waste materials into valuable goods. Patents safeguard these technologies, including those associated with renewable diesel, gelatin, and other outputs. These patents deter unauthorized usage by competitors.
Alongside brand recognition and technological advancement, regulatory compliance stands as another pivotal factor underpinning Darling Ingredients Inc's intangible assets. The sustainable food and feed industry is often governed by regulations related to waste disposal, environmental impact, and food safety. Darling Ingredients, for instance, abides by environmental regulations such as the Clean Air Act and the Clean Water Act, which oversee emissions, discharges, and waste disposal. Compliance with the Animal Welfare Act is also crucial. Successfully navigating these regulations creates a hurdle for new entrants, given the difficulty and expense involved.
Strategically positioned facilities across North America, Europe, and Asia furnish Darling Ingredients with logistical advantages for raw material sourcing and product distribution. This streamlined approach curtails costs and enhances efficiency. Furthermore, Darling Ingredients operates throughout the entire value chain of converting waste into useful goods. This vertical integration grants control over costs, quality, and supply, augmenting efficiency, and profitability. The economies of scale inherent in such extensive operations confer a cost advantage, bolstering a competitive edge.
Two other relatively minor sources of the economic moat are evident for Darling Ingredients Inc. Firstly, customers encounter high switching costs due to the integral nature of the company's products to their operations. Switching entails identifying and vetting a new supplier, adjusting documentation and procedures, and the risk of production disruption. A food manufacturer, for instance, relying on Darling Ingredients' products would need to overhaul recipes and processes when switching suppliers, incurring significant costs and disruption.
Secondly, Darling Ingredients leverages network effects. As its customer network expands, market liquidity for its products and services increases. This simplifies transactions. With a growing network of rendering plants, the company secures a larger raw material supply, leading to the negotiation of lower prices from suppliers. Likewise, a broader customer network translates to a more extensive pool of insights and feedback. This aids innovation and the creation of products and services attuned to customer needs.
In conclusion, Darling Ingredients Inc. stands fortified by a series of competitive advantages, firmly positioning it as a narrow-moat company. Its intangible assets, including brand recognition, technological prowess, and innovation, create a resilient foundation, fostering customer loyalty and inhibiting rivals from gaining ground solely through price competition. The company's adherence to stringent industry regulations reinforces its market position, while it's strategic geographic footprint and vertical integration confer logistical and cost efficiencies. Moreover, the interplay of high switching costs and network effects further solidifies its competitive edge. Altogether, these factors underscore Darling Ingredients' ability to maintain a distinctive market position.
Darling Ingredients Inc. has showcased a remarkable track record of consistent growth over the past five years, reflecting its robust financial performance. Notably, the company's revenue has experienced steady year-on-year expansion during this period. This consistent growth signifies the company's ability to capture market opportunities and effectively manage its operations. Moreover, Darling Ingredients Inc.'s net income has also exhibited a positive trend year after year. Although the free cash flow has not remained consistently positive over the past five years, the company's dedication to investing in its future growth cannot be overlooked. Impressively, the gross margin percentage has remained steady and even displayed growth over this timeframe, indicating the company's adeptness at managing its costs and maintaining profitability. Furthermore, the growth in free cash flow per share underlines Darling Ingredients Inc.'s commitment to delivering value to its shareholders, demonstrating its potential to translate financial success into shareholder returns.
Darling Ingredients Inc.'s approach to capital allocation has been marked by a mix of successes and challenges over the past five years. While its ROE has not consistently adhered to the 12%-15% range year on year, the company's performance still stands above its industry's average ROE. Conversely, the ROIC has not consistently maintained the targeted 12%-15% range annually. Furthermore, it's noteworthy that Darling Ingredients Inc.'s ROIC falls short of its WACC, suggesting potential inefficiencies in capital utilization. On a positive note, the company's declining trendline of outstanding shares is likely to please investors by enhancing each share's ownership stake.
Darling Ingredients Inc.'s financial health demonstrates a mix of strengths and potential concerns across various key indicators. The company's current ratio of 1.85 surpasses the benchmark of 1.0, indicating a reasonable short-term liquidity position and its ability to meet its immediate obligations. However, the debt-to-EBITDA ratio of 2.96 hovers just above the threshold of 3.0. Notably, Darling Ingredients Inc.'s debt-to-equity ratio has risen from 72.5% to 102.1% over the past five years, indicating an increased reliance on debt financing to support its operations and growth initiatives. Although the interest coverage ratio stands at 3.04, meeting the requirement of 3.0, it signifies a relatively slim buffer between operating earnings and interest payments. On a positive note, the company demonstrates effective management of its debt obligations with a debt servicing ratio of 10.6%, comfortably staying below the 30.0% threshold.
Investing in Darling Ingredients Inc. comes with a set of challenges and uncertainties to carefully consider. The company possesses a narrow economic moat, indicating that its competitive advantage might be limited. With a track record of unsatisfactory performance, questionable capital allocation decisions, and mixed financial health indicators, the investment landscape appears complex. Given these factors, a prudent investor would require a substantial margin of safety, preferably around 50%, to account for the considerable uncertainty associated with the company's prospects.
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