Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Stocks for Using A Benjamin Graham Value Investing Strategy – MarchÂ 2017.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Darling Ingredients Inc (DAR)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Darling Ingredients Inc. (Darling) is a developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy and fertilizer industries. The Company operates through three segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. 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. In addition, the Company provides grease trap services to food service establishments, environmental services to food processors and sells restaurant cooking oil delivery and collection equipment.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$2,568,747,478||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||2.05||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-1.18%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||27.96||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.32||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||2.05||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||3.63||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Fail|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-4.25%|
|MG Value based on 3% Growth||$8.23|
|MG Value based on 0% Growth||$4.82|
|Market Implied Growth Rate||9.73%|
|% of Intrinsic Value||N/A|
Darling Ingredients Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. Â The Defensive Investor is concerned with the Â insufficient earnings growth over the last ten years, and the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years, and the lack of dividends. Â As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1 in 2013 to an estimated $0.57 for 2017. Â This level of demonstrated earnings growth does not support the market’s implied estimate of 9.73% annual earnings growth over the next 7-10 years. Â As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Darling Ingredients Inc revealed the company was trading above its Graham Number of $12.51. Â The company does not pay a dividend. Â Its PEmg (price over earnings per share – ModernGraham) was 27.96, which was below the industry average of 34.94, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Â Finally, the company was trading above its Net Current Asset Value (NCAV) of $-10.81.
Darling Ingredients Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$10.81|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||3/1/2017|
|Total Current Assets||$927,301,000|
|Total Current Liabilities||$451,794,000|
|Shares Outstanding (Diluted Average)||165,864,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$0.58|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.57|
Other ModernGraham posts about the company
None. Â This is the first time ModernGraham has covered the company.
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.