DAR Stock Study (5-15-24)

I recently did a stock study on Darling Ingredients Inc. (DAR) with a closing price of $44.78. The previous study is here.

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. 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 last 10 years, this medium-size company has grown sales and earnings at annualized rates of 6.9% and 44.9% (fractional base for the latter). Lines are generally up and narrowing with YOY sales declines in ’15, ’18, and ’19 and EPS declines in ’16, ’18, ’20, and ’23 leaving visual inspection somewhat questionable (sales not consistently up and EPS appearing somewhat cyclical).

Over the past decade, PTPM trails peer and industry averages despite increasing from 2.1% (’14) to 10.6% (’23) with a last-5-year mean of 12.6%. ROE trails peer and industry averages despite increasing from 3.3% (’14) to 14.5% (’23) with a last-5-year mean of 15.6%. Debt-to-Capital is lower than peer and industry averages while ranging from 33.1% in ’21 to 52.4% in ’14 with a last-5-year mean of 41.8%.

Quick Ratio per M* is 0.8, and Interest Coverage is 5.8 per Value Line. The latter gives a B+ Financial Strength rating—down from B++ nine months ago.

With regard to sales growth:

• YF projects YOY 12.1% contraction and 6.0% growth for ’24 and ’25, respectively (based on 11 analysts).
• Zacks projects YOY 12.0% contraction and 7.7% growth for ’24 and ’25, respectively (4 analysts).
• Value Line projects 3.3% annualized growth from ’23-’28.
• CFRA provides ACE contraction of 12.2% YOY and 2.1% per year for ’24 and ’23-’25, respectively (10).
• M* provides a 2-year ACE of 1.4% contraction.

I am forecasting near the bottom of the range at 1.0% per year.

With regard to EPS growth:

• MarketWatch projects 4.1% and 4.8% per year for ’23-’25 and ’23-’26, respectively (based on 16 analysts).
• Nasdaq.com projects 39.1% YOY and 23.6% per year for ’25 and ’24-’26 [7, 7, and 2 analyst(s) for ’24, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 9.0%.
• YF projects YOY 25.8% contraction and 34.5% growth for ’24 and ’25, respectively (13), along with 5-year annualized growth of 10.0%.
• Zacks projects YOY 29.2% contraction and 39.1% growth for ’24 and ’25, respectively (7).
• Value Line projects annualized growth of 8.5% from ’23-’28.
• CFRA provides ACE of 24.1% YOY contraction and 3.0% growth per year for ’24 and ’23-’25, respectively (14).

My 7.0% per year forecast is at the bottom of the long-term estimate range (mean of three: 9.2%). Initial value will be 2024 Q1 EPS of $3.34 (annualized) rather than ’23 EPS of $3.99/share

My Forecast High P/E is 16.0. Over the past decade, high P/E trends down from 54.9 (’14) to 17.9 (’23) with a last-5-year mean of 21.6 and a last-5-year-mean average P/E of 16.0. I am near the bottom of the range [only ’19 (15.2) is less].

My Forecast Low P/E is 10.0. Over the past decade, low P/E trends down from 41.9 (’14) to 9.8 (’23) with a last-5-year mean of 10.4. My forecast is near the bottom of the range [only ’20 (5.8) and ’23 are less].

My Low Stock Price Forecast (LSPF) of $33.40 is default based on $3.34/share initial value. This is 25.4% less than the previous closing price and 14.4% less than the 52-week low.

These inputs land DAR in the HOLD zone with a U/D ratio of 2.7. Total Annualized Return (TAR) is 10.9%.

PAR (using Forecast Average—not High—P/E) of 6.3% is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 135 studies done in the past 90 days (my study and 33 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 5.6%, 7.0%, 17.8, and 10.4, respectively. I am lower on three of four. Value Line projects a future average annual P/E of 12.5 that is less than MS (14.1) and less than mine (13.0).

MS high / low EPS are $5.74 / $3.98 versus my $4.68 / $3.34 (per share). My high EPS is less due to a lower initial value (i.e. low EPS). Value Line’s high EPS of $6.00 is greater than both.

MS LSPF of $35.90 implies a Forecast Low P/E of 9.0 versus the above-stated 10.4. MS LSPF is 13.3% less than the default $3.98/share * 10.4 = $41.39, which results in more conservative zoning. MS LSPF is 7.5% greater than mine, however.

TAR (over 15.0% preferred) is much less than MS 17.4%. I believe MOS to be robust in the current study with the main contributor being use of most recent [depressed] quarterly EPS as initial value.

With regard to valuation, PEG is 1.8 per my projected P/E: slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly low at 0.84.

Stock is down 28.5% over the last nine months. With visual inspection mediocre and management metrics not overly impressive (lagging, downgraded, etc.), I’m personally not in any rush.

DAR is a BUY under $43/share. With a forecast high price of $75, my personal TAR criterion will be met around $37.50.