Darling Ingredients: Eminence Capital Acquires A Stake
By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"
Eminence Capital initiates a position On December 29, 2014, Eminence Capital disclosed a 5% stake in shares of Darling Ingredients, a global developer and producer of sustainable natural ingredients. Darling Ingredients position is new for Eminence Capital, and is one of the largest holdings in its portfolio. In addition to Eminence Capital, another hedge fund - Gates Capital Management, disclosed that it recently increased its position and as of January 12th, 2015, it owned a 10.4% stake in the company. For Gates Capital Management, the Darling Ingredients position is the largest one and accounted for about 8.8% of the fund's portfolio. Company profile Darling Ingredients is a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, technical, fuel, bioenergy and fertilizer industries. With operations on five continents, the company collects and transforms all aspects of animal by-product streams into useable and specialty ingredients, such as gelatin, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides. The company also recovers and converts used cooking oil and commercial bakery residuals into valuable feed and fuel ingredients. In addition, Darling Ingredients provides grease trap services to food service establishments, environmental services to food processors and sells restaurant cooking oil delivery and collection equipment. Valuation Darling Ingredients went through a period of transformation in the past two years. In 2013 the company acquired the VION Ingredients business division of VION Holding (completed in January of 2014) and also in 2013 completed the acquisition of assets of Rothsay, a division of Maple Leaf Foods Inc, a Canadian company. Consequently, company changed its name and its business operations were reorganized into three new reportable operating segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. Based on a recent share price, Darling Ingredients Inc. had maket capitalization of $2,814 million, net debt of $2,100 million and enterprise value of $4,914. Company is currently valued at an EV/EBITDA multiple of x11.3 and x8.6, based on annualized 9M 2014 EBITDA and LTM Q3 2014 adjusted EBITDA results. Conclusion
Company's operations are highly dependent on costs of natural gas and diesel fuel. Darling Ingredients consumes significant volumes of natural gas to operate plants, and large volumes of diesel fuel to operate its fleet of tractors and trucks used to collect raw materials. The prices of natural gas and diesel fuel declined significantly over the past year. These developments should positively impact Darling's bottom line in the upcoming quarters. It is safe to assume that it is one of the reasons that Eminence Capital initiated a position in Darling shares while Gates Capital Management increased its holding. Conservative valuation, presence of two well-known hedge funds, end of the transformation period and decline of energy prices make Darling Ingredients an interesting investment target for a long-term, value investor.
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