Darling Ingredients: Global Food Processing and Ingredients Company

Eric DeLamarter presented his in-depth investment thesis on Darling Ingredients (DAR) at Best Ideas 2015.

Darling Ingredients: Darling is a global food processing and ingredients company. The Company’s core rendering business is the largest and only national operator in the US. Darling has leading global positions in various other products categories. The industries in which Darling operates have high barriers to entry due to very rigid environmental permitting for new plants, complex supply chains and processing specialization.

DAR has undergone a series of recent acquisitions that have significantly improved its financial profile, but at the same time muddled the financial picture and created a significant disconnect between price and value. Two acquisitions have doubled DAR’s size and transformed it from a regional rendering business with high commodity price exposure (40% of input costs) to a global food processing and ingredients company with more specialized products (higher margin, more pricing power, higher ROIC, less cyclical) and less sensitivity to commodity prices (15% and declining). The benefits of the new business model have yet to be realized due to transitory events that have now subsided. The Company is erroneously categorized based legacy business profile.

Despite its more attractive pro forma financial profile, DAR still trades below its historical multiple range. At the current price you are getting a diversified, value-added food processing and ingredients business at a commodity-exposed, regional waste disposal/ Ag processing company valuation (7.2x pro forma EV/EBITDA, 11% FCF yield) while also getting any incremental revenue and margin upside from the acquisitions for free. Implied stock price at 15x cash EPS, 10x EV/EBITDA: $30 per share (50-60% upside).

About the instructor:

Prior to founding Half Moon Capital in 2011, Eric was a research analyst at Stelliam Investment Management, a value-oriented hedge fund. Prior to Stelliam, from 2006 to 2008, Eric was an associate at Lineage Capital, LLC, a middle-market private equity fund. From 2003 to 2006, Eric was an investment banking analyst at RBC Capital Markets, and during 2001, Eric was an equity research associate at Merrill Lynch. Eric earned an M.B.A. from The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School, with a concentration in applied value investing, in 2010 and a B.A. from the University of Michigan in 2002.

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