Darling Soldiers

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by Debra Fiakas CFA

This week Darling Ingredients (DAR:  NYSE) reported financial results for the quarter ending December 2015, demonstrating management’s collective ability to manage margins in a period of low inflation.  The fourth quarter 2015 top-line was $809.7 million, providing $84.4 million in net income or $0.52 per share.  Revenue was 19.1% lower than the same period last year, but net income increased by 20.7% year-over-year.  Weak commodity prices led to lower sales volumes and selling prices that translated into lower year-over-year revenue.  At the same time the commodity market compression also reduced raw materials costs, increasing profit margins.

The Company also benefited from its investment in the Diamond Green Diesel joint venture with Valero (VLO:  NYSE), by capturing value in the fats supply chain that might have otherwise been lost to Darling as an animal fats recycler.  The joint venture is part of Darling fuel ingredients segments, which delivered 8.1% of total sales to the mix in the fourth quarter and an exceptional 37.9% of operating income.

Earnings in the December quarter far outpaced expectations for a two-bit bottom line.  It was the first upside surprise delivered by the Company in over a year.  Consequently, under higher than average trading volume, the stock gapped higher in the first day of trading following the earnings announcement and conference call.  The stock gapped higher again in the final day of trading last week, moving well above a line of price resistance that we believed was developed through historic trading volumes at the $11.50 price level.

soldier fly.jpg Yet exceptional profit is not the only thing sparking investor interest in Darling Ingredients.  Last week Darling announced a new joint venture with Intrexon Corporation (XON:  NYSE) to develop black soldier flies for fish and poultry feed.  Concurrently, Intrexon acquired EnviroFlight LLC and its proprietary fly husbandry processes as part of the effort to cultivate black soldier fly larvae for fish and poultry feed.  The product is expected to be highly marketable given the merits of larvae over wild fish or other protein by-products for these markets.  Successful introduction of fly larvae as a preferred feed is also expected to reduce threats to fishing waters from over-fishing and pollution.

There were numerous questions during the earnings conference call about the joint venture and the apparent expansion of interest on the part of Darling to expand beyond feed by-product recycling to new feed production.  Randall Stuewe related the Darling’s history of work with EnviroFlight as a development partner with the fledgling protein producer.  The relationship has been formalized into a joint venture with EnviroFlight’s new owner, Intrexon.

Stuewe stated clearly that population growth is outpacing the ability of pastures and fields to produce enough animal feed protein.  In particular new sustainable sources of protein are needed for poultry and aquaculture to reduce pressures on other feed sources.  Darling has committed approximately $3 million in capital to building a pilot plant for cultivation of black soldier fly larvae.  Although a site has not yet been determined, construction could still begin in 2016.  Ultimately, each production facility could cost between $4 million to $5 million, with additional capital required to begin operation.

The black fly project adds a new dimension to Darling Ingredients business model, which has to this point been largely as a recycler of food by-products not as a cultivator of original feed.  Darling Ingredient’s management culture has proven that it is able to handle a wide range of business challenges from tough pricing environments, to large, multi-faceted acquisitions and joint ventures.  There is plenty of reason to have confidence in Darling’s soldiers.

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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