Best stock to invest in – Darling Ingredients’ Bean Stalk | Alternative Energy Stocks

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by Debra Fiakas CFA

Once upon a time there was a boy named Jack,
Who lived with his widowed mother
On their small farm in the country.
—Benjamin Tabart, The History of Jack and the
Bean Stalk

Jack made a mistake or two on the road to fixing his family’s income
problems, but in the end Jack’s bean deal prove lucrative.  We
are wondering if Darling

NYSE) acquisition of VION Group in early 2014, will prove as
beneficial to the food by-products processor.  The VION
operation was a division of VION Holdings N.V. based in the
Netherlands that just like Darling collects and re-purposes
by-products of grain and animal food production in Europe.

The VION deal expanded Darling’s food by-products business with six
new brands that at first appeared to simply add processing capacity
and visibility in the European and Asian markets.  Indeed, like
its new parent VION operates rendering plants that produce both
edible and non-edible fats, cures hides, biofuel, and proteins,
blood and other edible products used as food ingredients. 
However, over the last year and a half, the addition of those six
brands appears to have confused rather than enhanced valuation of

Darling’s long history as a recycler of food by-products was altered
with the Company’s entrance into a renewable diesel joint venture
with Valero Energy (VLO) in 2009.  This week the Company staged
an investor-analyst forum in New York City to highlight its building
position in the food ingredients market.  Darling is recasting
itself as a producer of ‘sustainable food, feed and fuel solutions’
and has put VION in the middle of the table as the center piece.

VION produces two products that standout among others as more than
Darling’s usual commodities. Gelatin is produced from chicken, beef
and pork bones and is sold under the brand name Rousselot.  In
the increasingly health conscious society gelatin food producers are
finding more and more applications for gelatin.  Likewise
gelatin is gaining use in the pharmaceutical industry for capsules,
sponges, vaccines and fillers.  Made from bioactive proteins
collagen is sold under the name Peptan, which is becoming
increasingly visible in final products that advertise the use of
organic and healthy ingredients.  These two products require
closer collaboration by VION with end users and lift the veil of
anonymity that typically hide commodity producers.

We believe Darling paid for VION’s high value-added product line,
but its shareholder base has not fully appreciated the merits of the
deal.  The purchase price of $2.2 billion, represented a
multiple of 8.0 times EBITDA and 0.9 times sales at the VION
division in the twelve months ending June 2013.   Darling
shares have struggled since closing the VION deal, in part because
profit margins have been under pressure and in part because of the
added leverage required to complete the deal.  However, we also
believe the highly visible brands of VION have been more a cause for
concern than a reason to bid the stock price higher.  

The senior executives of VION were in attendance at the Darling
analyst forum, providing details on the product line and explaining
VION’s position in end markets.  The event was designed to make
clear Darling’s expanded share of its markets.  Although it was
not immediately apparent in trading in DAR, in the days following
the event, the presentations may eventually accomplish the desired
effect on valuation.

The forum event may have also provided unintended peak under
Darling’s corporate kimono.  There appears to be a cultural
divide between the U.S.-based senior management and the
European-based leadership at VION.  One side was typified by
the gregariousness, age and mostly wide-girth of U.S. executive
leadership and the other by the more svelt and youthful
Europeans.  The former knows well the requirements of managing
the spread between the cost of raw materials and selling prices for
finish goods  –  knowledge which have driven the
consistent profits that are at the core of our bullish investment
thesis for Darling.  On the other hand the VION team appears to
understand the competitive positioning and marketing requirements
for a line of leading edge food and feed ingredients, but lacks the
full awareness for conservative management of profit margins.

Indeed, the two groups were physically positioned apart from each
other, providing a somewhat unsettling optic for the forum
event.  Retirement age and health questions were clearly
visible as executive officers stood before the audience of analysts
and investors.  The image at the event begged the question of
succession.  The company already had to call back its chief
financial officer from retirement after his replacement failed to
‘find a home’ in Darling’s corporate culture.  We foresee more
turbulence related to cultural and succession issues in the coming
years.  Of course, VION is not the only source of talent to tap
for the C-suite.  There are any number of possible candidates
among experienced and capable individuals in the U.S. and Canadian

We continue to rate Darling a Buy at this time.  A stable,
consistent management style and a conservative operating structure
have always been at the foundation of our investment thesis for
Darling.  The issue of succession is causing some concern that
as the Company has grown, the old decision making frame work and
operating infrastructure cannot sustain the company in the
future.  The ‘VION bean’ that Darling has sown may depend upon
real change in Darling’s corporate culture.

Debra Fiakas is the Managing Director of
Crystal Equity
, an alternative
research resource on small capitalization companies in selected

Neither the author of the Small Cap
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein. Crystal Equity
Research has a Buy rating
on DAR
and Darling Ingredients is included in the Biofuel

Group of the Beach Boys Index of alternative energy
developers and producers.

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