Darling International Inc. (NYSE:DAR) acts as a provider of waste recycling and recovery services for food providers. For example, it processes animal by-products from meat processors and restaurants into meal, tallow, and grease. 2012 is shaping up to be a tough year for Darling, as its revenues were down 10% and its net income was down 34% in the first six months of the year compared to the same period in 2011 (including a 7% fall in sales in the second quarter versus last year). Sales and operating income were off in both the rendering and bakery segments. The company attributed its results to weaker demand, particularly in Europe, and lower prices. The second quarter of 2012 was the fourth quarter in a row that Darling had failed to meet analyst expectations.
Year to date Darling’s stock has beaten the market, however, rising 36% against an S&P 500 which is up only about 15%. The market capitalization now stands at $2.2 billion, with relatively low debt on the company’s balance sheet. Darling International Inc. trades at 16 times trailing earnings as the market believes that it should at least be able to see moderate growth in the next few years; Wall Street analysts agree, expecting earnings per share for 2013 to come in at $1.44 (19% higher than their estimates for 2012). Given these projections the forward P/E multiple is 13.
Jeffrey Gates’s Gates Capital Management was the top hedge fund holder of Darling International Inc. at the end of June, reporting a position of 4.9 million shares. This stake, up 54% from the end of the first quarter of 2012, made Darling one of the fund’s top five positions according to its 13F portfolio (see more stock picks from Jeffrey Gates and Gates Capital Management). Royce & Associates, managed by Chuck Royce, reduced the number of shares in its portfolio but still finished the quarter with ownership of 2.5 million shares (find more stocks owned by Royce & Associates). Joel Greenblatt, founder of Gotham Asset Management and the website Value Investors Club as well as author of several books on investing, also owned shares of Darling (see Joel Greenblatt’s top picks).
Darling operates is a fairly unique business, so we will compare it to other companies with niches in the waste management industry. Covanta Holding Corporation (NYSE:CVH) is a waste disposal company which generates energy from waste and also sells reclaimed metals. It owns a total of 45 waste-to-energy plants in North America. Covanta has about the same market cap as Darling but is more expensive on a multiples basis, trading at trailing and forward earnings multiples of 32 and 26, respectively. Stericycle Inc (NASDAQ:SRCL) is a specialized waste management company for the healthcare sector, disposing of medical waste. It trades at 31 times trailing earnings, but we think that it does deserve a higher multiple than Darling based on the higher value-add of its business and its double-digit growth rates in revenue and earnings last quarter compared to the same period in the previous year. Heckmann Corporation (NYSE:HEK) and Veolia Environnement Ve SA (NYSE:VE) dispose of wastewater, though they serve two very different markets: Heckmann focuses on wastewater disposal for oil and gas companies which generate water from production, while Veolia manages general wastewater collection and decontamination plants. Both of these companies have seen their stock prices decline over the last year. Heckmann is priced for strong future growth. The stock trades at 66 times forward earnings estimates, which is high, but the company did double its revenue last quarter (and see a large increase in its income) compared to the same period last year. France-based Veolia carries a trailing P/E of 11. Darling therefore has quite reasonable valuation multiples compared to its peers, and might make for the best buy of the lot if an investor doesn’t want to depend on continued high growth at Stericycle.