DAR Stock Study (8-17-23)

Posted by Mark on October 6, 2023 at 07:00 | Last modified: August 17, 2023 11:44

I recently did a stock study on Darling Ingredients Inc. (DAR) with a closing price of $62.61.

M* writes:

     > Darling Ingredients Inc develops and manufactures sustainable ingredients
     > for customers in the pharmaceutical, food, pet food, fuel, and fertilizer
     > industries. It collects and transforms all aspects of animal by-product
     > streams into ingredients, including gelatin, fats, proteins, pet food
     > ingredients, fertilizers, and other specialty products. Also, the company
     > recovers and converts used cooking oil and bakery remnants into feed
     > and fuel ingredients. Darling has three primary business segments: feed
     > ingredients (the majority of revenue), food ingredients, and fuel
     > ingredients. It provides grease trap services for food businesses and sells
     > various equipment for collecting and delivering cooking oil. The company
     > derives the majority of its revenue from customers in North America.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 8.5% and 27.5%. Lines are generally up and parallel with YOY declines for sales in ’15, ’18, and ’19 along with ’14, ’18, and ’20 for EPS. PTPM trails peer and industry averages despite increasing from 9.5% in ’13 to 13.7% in ’22 with a last-5-year mean of 11.1%.

Also over the past decade, ROE trails peer and industry averages despite increasing from 12.9% in ’13 to 20.1% in ’22 with a last-5-year mean of 13.6%. Debt-to-Capital is lower than peer and industry averages while ranging from 30.5% in ’13 to 52.4% in ’14 with a last-5-year mean of 40.2%.

Quick Ratio is 0.9 and Interest Coverage is 5.5. Value Line rates the company B++ for Financial Strength.

With regard to sales growth:

• CNN Business projects 13.8% YOY and 8.1% per year for ’23 and ’22-’24, respectively (based on 15 analysts).
• YF projects YOY 11.1% and 4.2% for ’23 and ’24, respectively (10 analysts).
• Zacks projects YOY 13.1% and 5.5% for ’23 and ’24, respectively (4).
• Value Line projects 5.4% annualized growth from ’22-’27.
• CFRA provides ACE of 10.3% YOY and 7.3% per year for ’23 and ’22-’24, respectively (10).
• M* provides a 2-year ACE of 8.8%.

I am forecasting near the bottom of the range at 5.0% per year.

With regard to EPS growth:

• CNN Business projects 21.6% YOY and 17.2% per year for ’23 and ’22-’24, respectively (based on 15 analysts), along with 5-year annualized growth of 2.0%.
• MarketWatch projects 10.8% and 9.6% per year for ’22-’24 and ’22-’25, respectively (15 analysts).
• Nasdaq.com projects 7.3% YOY and 7.0% per year for ’23-’25 and ’23-’26 [7, 3, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 9.0%.
• YF projects YOY 22.7% and 11.8% for ’23 and ’24, respectively (11), along with 5-year annualized growth of 43.0%.
• Zacks projects YOY 17.8% and 8.3% for ’23 and ’24, respectively (7).
• Value Line projects annualized growth of 12.2% from ’22-’27.
• CFRA provides ACE of 22.9% YOY and 16.2% per year for ’23 and ’22-’24, respectively (11).

My 2.0% per year forecast is at the bottom of the long-term estimate range. I consider this quite conservative as the mean and median of four estimates are 16.6% and 10.6%, respectively. Of the extremes, I am more puzzled by YF than CNN Business although I scratch my head at both. A larger estimate range also encourages me to lean more conservative due to perceived uncertainty.

My initial value is ’22 EPS of $4.49/share rather than 2023 Q2 EPS of $4.82 (annualized).

My Forecast High P/E is 19.0. Over the past decade, high P/E trends down from 17.7 in ’13 to 12.4 in ’22 with a last-5-year mean of 13.9. My forecast is near the bottom of the range [only ’19 (15.2) is lower].

My Forecast Low P/E is 11.0. Over the past decade, low P/E trends down from 17.7 in ’13 to 12.4 in ’22 with a last-5-year mean of 13.9. My forecast is near the bottom of the range [only ’20 (5.8) and ’19 (9.8) are lower].

My Low Stock Price Forecast (LSPF) of $49.40 is default based on $4.49/share initial value. This is 21.1% less than the previous closing price, 4.6% less than the 52-week low, and 11.3% less than the lowest price from 2020-1.

These inputs land DAR in the HOLD zone with a U/D ratio of 2.4. Total Annualized Return (TAR) is 8.5%.

PAR (using Forecast Average—not High—P/E) is 3.5%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 184 studies done in the past 90 days (my study and 42 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 7.0%, 9.2%, 19.4, and 12.2. I am lower across the board. Value Line’s future average annual P/E of 18.0 is higher than both MS (15.8) and mine (15.0).

MS high / low EPS are $7.15 / $4.50 vs. my $4.96 / $4.49 (per share). My high EPS is much lower due to the very conservative EPS growth rate discussed above.

MS LSPF of $50.00 implies a Forecast Low P/E of 11.1 vs. the above-stated 12.2. MS LSPF is 8.9% less than the default $4.50/share * 12.2 = $54.90, which results in more conservative zoning. MS LSPF remains 1.2% greater than mine.

My TAR (over 15.0% preferred) is much less than the 16.3% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG per my projected P/E (using that very conservative EPS growth rate) is 6.4: substantially overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is significantly undervalued at 0.54. Kim Butcher’s “quick and dirty DCF” prices the stock at 11.5 * [$10.50 – ($1.00 + $5.00)] = $51.75 thereby suggesting the stock to be overvalued by 21.0% [I’m a bit puzzled by the $5.00 ’26-’28 CapEx, which is twice as much as anything seen historically or projected through ’24].

Based on this analysis, DAR is a BUY under $60/share. For me, TAR would still not qualify. With a Forecast High Price of $94.20 [in five years], I should look to invest up to $94.20 / 2 = $47.10. If you believe DAR capable of realizing greater than a 2.0% EPS growth rate, then this threshold can be relaxed.

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