What a fantastic six months it’s been for Darling Ingredients. Shares of the company have skyrocketed 84.3%, hitting $57.94. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Darling Ingredients, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Darling Ingredients Not Exciting?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons we avoid DAR and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Darling Ingredients’s demand was weak and its revenue declined by 2.1% per year. This wasn’t a great result and signals it’s a lower quality business.
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Looking at the trend in its profitability, Darling Ingredients’s operating margin decreased by 3.7 percentage points over the last year. Darling Ingredients’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 4.5%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Darling Ingredients, its EPS declined by 41.3% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Darling Ingredients’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 17.2× forward P/E (or $57.94 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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