How to Profit From Inedible Oils and Meats
Arturo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stock investors attracted to opportunities in basic food companies can find a position in Darling International (NYSE: DAR)attractive. It’s not a food producer but it has thrived for more than a hundred years on recycling the by-products of meat processors and food service establishments.
This company operates in two segments: rendering and bakery feed. The rendering segment not only helps America make use of the estimated 60 billion pounds of inedible by products from processing red meat alone annually, but contributes in reducing use of landfills, incinerators, and the environmental issues associated with these disposal systems.
Broad supply and market bases
The company renders raw materials consisting of beef, pork and poultry by-products collected from meat and poultry processors, butcher shops, grocery stores and food service establishments. Darling International likewise collects cooking oil and trap grease from food service establishments, restaurants and grocery stores.
The company processes these collected materials into bio-fuels. Part of the recycled materials is also sold to buyers in the U.S. and overseas for the production of pet and animal feed and fertilizer, as well as to other bio-fuel makers. Some of the processed materials are likewise supplied to manufacturers of consumer and industrial products, such as leather goods, oleo-chemicals and soaps.
Major JV going onstream
In addition to these rendering and bakery feed segments, a 50–50 joint venture between Darling International and traditional fuel oil refiner Valero Energy's (NYSE: VLO)Diamond Green Diesel (DGD) unit, is set to commission its newly built renewable diesel plant in Norco, Louisiana, in the 2013 second quarter. This plant looms as the largest U.S. renewable diesel recycling refinery for animal fats and greases.
It is estimated that DGD will absorb approximately 11% of the U.S. waste fat and grease supply, in the process producing 137 million gallons of renewable diesel fuel annually. DGD has a daily capacity of about 9,300 barrels of renewable diesel and other co-products, using primarily grease, animal fats and used cooking oil as raw materials. Its advanced pre-treatment and conversion processes are licensed from third parties.
Competing recycler only benefits lawyers
Tyson Foods (NYSE: TSN), one of the largest U.S. meat processors, has a similar JV, Dynamic Fuels, which became operational in October 2010. However, this Tyson partnership with the microcap company Syntroleum (NASDAQ: SYNM) appears to be having lingering birth pains.
Smaller than DGD with its 75-million-gallon annual capacity, Dynamic Fuels posted net operating losses of nearly $40 million during Tyson’s 2011–2012 fiscal year. Besides having major technical issues and mechanical difficulties, Dynamic Fuels is threshing out other problems in its technologies which are potentially beneficial only to lawyers. This June, Syntroleum sued Neste Oil Singapore for allegedly violating patents on its process for hydro-cracking biological feedstocks and the hydrocarbons derived from then, Apparently, this is a counter-suit against Neste Oil which filed in May last year a patent infringement suit against Dynamic Fuels’ renewable diesel technology.
Where synergies look better
Darling International, on the other hand, seems to have a better handle on its DGD JV with Valero. This venture is a perfect match to its wholly owned subsidiary, Griffin Industries, acquired in end-2011. This unit has been producing bio-diesel since the late 1990s even prior to the U.S. Energy Dept. recognizing this fuel alternative. Notably, Griffin’s Butler, KY, flexible-feedstock bio-diesel facility is the longest continuing operation of such kind in the U.S. Griffin is also a supplier of primary feedstock to other bio-diesel producers. Darling International drew $868.2 million or about half of its total 2012 sales of $1.7 billion from Griffin.
The successful integration of Griffin into Darling International was evident in the latter’s 2013 first quarter results which were ahead of analysts’ forecasts. Its net income for the period rose to $32.4 million, or $0.27 per share, from $28.6 million, or $0.24 per share, a year earlier.Net sales increased year over year to $445.4 million from $387.1 million. Announced May 9, the earnings beat rewarded Darling International shares which posted a 52-week high of $20.10 the day after.
Final take: this partnership will go places
The economic symbiosis that Valero and Darling International established in DGD can bring in additional gains for both partners besides the returns from the joint venture itself. The JV diversifies Valero’s fuel source for its customers while Darling International gets an added conduit for the output of its prolific Griffin unit. The renewable diesel it produces can be channeled and distributed through Valero’s existing pipeline system and distribution network because this fuel output has the same specs as petroleum diesel.
As a final thought, initiating a position on Valero, which has 16 petroleum refineries in the U.S., Canada, the U.K, and Aruba, has sound merits too. Like Darling International, its latest results beat analysts’ consensus estimate. In its most recent quarter, Valero reported $1.18 EPS, ahead of the $0.98 forecast, and revenue of $33.47 billion, above the $30.41 billion market expectation. Currently trading at just around seven times its earnings, Valero likewise looks a bargain in addition to it having secured a robust pipeline on Darling International’s lucrative renewable energy business.
Arturo Cuevas has no position in any stocks mentioned. The Motley Fool recommends Darling International. The Motley Fool owns shares of Darling International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!