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A good piece about DAR was published over at Seeking Alpha today - I’ve read other pieces by Tristan R. Brown about DAR over there before, and they have always been worth my time (and your click). He discusses the recent pressure on earnings in light of commodity pricing, the timing of recent Canadian (Rothsay) and European (VION) acquisitions (i.e. how the strength of the dollar vs. the loonie and the euro

as you might have noticed…

Global food recycler and processor Darling Ingredients (NYSE:DAR) (formerly Darling International) has seen its share price fall sharply since July 2014 (see figure) as energy, grain, and lipids prices have all declined in tandem. The single largest share price drop came last month when, despite soundly beating on both lines in its Q4 earnings report, the company saw its shares downgraded by Goldman Sachs due to its unfavorable operating environment. Formerly one of the market's strongest performers, recording a 600% price increase between early 2009 and Q3 2013, Darling Ingredients has subsequently seen its share price fall by 41% since Q4 2013.

On the less than perfect timing of the Rothsay and VION acquisitions…

These acquisitions (Rothsay and later, VION) were initiated as the prices of the commodities that influence the value of Darling Ingredient's major products were all at or near historical highs (see figure). Agricultural prices began to fall rapidly near the end of 2013, however, and continued to lose value throughout 2014. Likewise, the price of diesel fuel, which drives the prices of the company's biodiesel and renewable diesel products, fell sharply during the second half of 2014 as petroleum prices declined worldwide. As a result Darling's margins have collapsed since Q3 2013 even as its total assets have more than tripled. The recent fall in the company's share price can be attributed to investors re-evaluating its earnings potential in light of the recent commodities downturn

On revenue growth that has not (yet) translated to earnings growth… and why…

Darling Ingredients has seen its revenues grow strongly over the last five quarters as it has closed on its acquisitions. This did not contribute to much in the way of earnings growth until the most recent quarter, however, due to a combination of lower commodity prices and bad luck (a fire at its Diamond Green Diesel facility knocked it out of production for half of Q3 2014, for example). The company reported its worst quarterly earnings in years in Q1 2015 with a non-adjusted diluted EPS of -$0.32 due to a combination of one-time acquisition-related expenses and weak global demand for biofuel. The Q3 earnings were also very weak because of the aforementioned fire and falling fuel prices

On margins and returns..

Darling's margins and returns rapidly deteriorated in FY 2014 due to the presence of lower prices. Its net margin fell to 1.6% compared to 9.4% in FY 2011 (see table). Likewise, its return on assets, return on equity, and return on invested capital numbers have also declined steadily from their FY 2011 levels. Most worrisome is the fall in its interest coverage ratio to 1.6x. While not unexpected given the recent growth in the company's long-term debt and falling EPS numbers, this could be a cause for concern if energy and lipids prices do not rebound in the coming years.

On valuation…

Darling Ingredients has a trailing P/E ratio of 35.8x based on its share price at the time of writing of $13.98. While very high compared to its historical average, the trailing number is skewed by the company's negative Q1 2014 non-adjusted EPS result, which was driven in large part by one-time expenses associated with its acquisitions. The company's adjusted trailing P/E ratio is lower at 15.9x, although this is still on the high end of its 5-year range (ignoring the impact of the Q1 2014 EPS)

and then this solid little tidbit (emphasis mine)

It should be noted that Darling's current share price can only be considered overvalued if the reductions to the consensus estimates remain in place. While I do not expect them to change substantially for the current fiscal year for reasons discussed in the next section, the FY 2016 consensus estimate would be lower than the company achieved in both FY 2011 and FY 2012 despite the presence of synergies resulting from its recent acquisitions. The consensus FY 2016 estimate from 60 days ago of $1.64 results in a forward P/E ratio of 8.5x, which is below even the lowest trailing P/E ratio reported by the company over the last five years. A return to its five-year average ratio of roughly 13x with a FY 2016 EPS of $1.64 would result in a share price of:

13 x $1.64 = $21.32

or an increase of 53% over its current share price.
Analyst estimates have a tendency to trail current market conditions, so rebounding energy and/or agricultural prices would almost certainly result in a higher share price compared to its current level.

And then his conclusion:

Darling Ingredients has seen its share price move substantially lower over the last several months as falling fuel and agricultural commodity prices have caused analysts to revise their earnings estimates for the company down. Despite this falling share price the company's shares are not blatantly undervalued, even on an adjusted trailing EPS basis. Potential investors should note, however, that the company's earnings are unlikely to fall lower in coming quarters since the prices of lipids, corn, and diesel fuel are all at or near their post-recession lows. Furthermore, excluding extraordinary and one-time items, Darling has already shown signs of achieving synergies from its recent acquisitions - for example, its adjusted EPS for FY 2014 did not fall by as much on a YoY basis as the prices of lipids, corn, and diesel fuel would have indicated. The lack of a low trailing P/E ratio on an adjusted basis prevents me from recommending Darling Ingredients' shares as an unqualified long opportunity at this time, but I recommend that investors add it to their watchlist and wait for a buying opportunity to present itself as the result of either a still-lower share price or rebounding commodity prices.

It’s really a good bit of work - one I’m going to read through again when i have a little more time.

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