Chapter One
The Classic Under $10 Stock
A Darling with a Record of Breakout
Profits
When I am asked about the perfect single-digit stock, I like to tell the
story of a company called Darling International (DAR). You could call it
the classic under $10 stock. You see Darling is in a business that literally
stinks; they collect the used cooking oil and grease from restaurants all
over the United States as one part of their business. Another division of
the company stops at slaughterhouses and butcher shops to collect hides,
bones, and other animal by-products. What on earth did they do with
what they collected? In a nutshell, they turned all the messy unusable
stuff they picked up into useable products. This is hardly a glamorous
business.
But I thought it was a very exciting business when I came across the
stock back in late 2008. The stock got crushed along with everything
else in the market, falling from around $16 earlier in the year. The stock
kept falling, eventually bottoming at around $4 in November of 2008.
The company had never been widely followed on Wall Street, but now
no one cared about the company at all it seemed. But not me; I smelled
opportunity and took a closer look at the company.
As near as I could determine, Darling was the only rendering and
collection company that was national in scope and capability. Their
competitors were small, locally-owned companies that could not
compete with the economies of scale Darling was able to achieve. At the
time the company had 39 facilities around the United States and 970
trucks and tractor-trailers collecting raw materials from 115,000
different locations. Most of their raw materials customers were on long-
term contracts, so they had a stable supply of raw materials.
In addition to having a competitive advantage over most of its
competitors Darling was not averse to simply buying them either. When
I looked at the bottom line what was very clear was that by both
acquisition and organic means this company was growing fairly rapidly.
Revenues at Darling had nearly doubled from $323 million in 2003 to
$645 million by the end of 2007. Net profits had risen sharply as well
reaching $45 million compared to about $18 million just four years
earlier. The earnings per share had almost doubled from $.29 a share to
$.59 at year-end. Darling had doubled its asset base over the four years
and paid down their long-term debt over the same time period. The
company was not slowing in 2008 either. In the first half of 2008 the
company had year-over-year revenues of $422 million compared to
$298 million and earnings per share of $.55, compared to only $.29 a
share in 2007.
Darling may be in a stinky business, but it is one profitable company.
In spite of this, by the end of 2008 the stock was solidly in the single
digits, trading at $5 and change. I had to know more, so I dug into the
filings and reports from the company. When I did, I quickly discovered
that Darling was moving into alternative energy areas where the
collected grease could be used as a source of biofuel. Now from what I
saw, if the recession deepened, it was likely that the company would see
some pricing pressure as demand for its end products slowed, but it was
clear that the demand would not permanently be destroyed. By the end
of the year the stock price slipped under $5 and it was clear to me that it
was time to buy.
I didn’t catch the exact low, but I was close. Darling saw some
revenue declines throughout 2009 but this was more than priced into the
shares at that point. Revenues declined year over year but by the fourth
quarter the company was back on track and end market demand was
picking up. In September of 2009 they announced a new renewable fuels
venture with Valero Energy, a major oil refiner. The stock price almost
doubled by the end of 2009, to around eight bucks a share. By midyear
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