Over the past year there has been a well documented increase in food prices around the world. In the last year corn prices are up over 70% and soybean prices are up over 40%. CNBC’s Jim Cramer articulated his thesis on the global food question earlier this week. The thesis is based on a global trend towards a more protein heavy diet that includes more beef and chicken. Raising cattle and chickens requires food stock – corn and soybean. Add in further demand for these crops from the biofuel industry and it is not surprising that the demand/supply dynamics have led to significant price increases.
Darling International (DAR)
Darling International is a provider of animal rendering, cooking oil and bakery waste recycling and recovery services. Essentially, Darling collects and recycles animal by-products, bakery waste and used cooking oil from poultry and meat processors, commercial bakeries, grocery stores, butcher shops, and restaurants. Darling also provides grease trap cleaning service.
Darling processes the raw materials it collects and produces meat and bone meal protein, poultry meal, tallow, poultry grease, yellow grease, bakery by-products and hides. The products are sold nationally and internationally, primarily to producers of animal feed, pet food, fertilizer, bio-fuels and other consumer and industrial ingredients, including oleo-chemicals, soaps and leather goods for use as ingredients in their products or for further processing. The prices Darling is able to charge is highly correlated with commodity prices for corn, soybean, and soybean oil.
In late 2010 Darling acquired Griffin Industries adding scale to its rendering and bakery recycling businesses. Darling is benefiting tremendously from increasing its scale at an inflection point in its pricing.
At $ 14.92 per share Darling has a market capitalization of $ 1,711 million and an enterprise value of $ 2,090 million. With $ 291.4 of LTM EBITDA Darling is trading at 7.2x. Consensus EBITDA for 2011 is $ 426 million implying a multiple of only 4.9x. Further, with $ 111 million of EBITDA in the recently announced second quarter it is clear that Darling is benefiting from the price increases in food commodities as well as the synergies of the Griffin acquisition. At under 5x 2011 EBITDA, Darling is inexpensive especially in light of a multi-year global trend in global food pricing.
Titan International (TWI)
Titan International, Inc. is a manufacturer of both wheels and tires for the off-highway industry. Titan is one of the few companies dedicated to off-highway wheel and tire products and produces a broad range of specialty products to meet the specifications of original equipment manufacturers (OEMs) and aftermarket customers in the agricultural, earthmoving/construction and consumer markets. Titan’s earthmoving/construction market includes wheels and tires supplied to the mining industry, while the consumer market includes products for all-terrain vehicles (ATVs) and recreational/utility trailers.
At $ 18.97 per share Titan has a market cap of approximately $ 1,000 million and an enterprise value of $ 1,219 million. With LTM EBITDA of $ 124 million Titan trades at 9.9x. Titan plays on a larger global theme recently articulated by Jim Cramer. Food prices are increasing as corn and soybean prices increase. This is being driven by an evolution in developing countries to more protein heavy diets.
These diets utilize more chicken and beef, which in turn requires feedstock (corn, soybeans, etc.). These increased prices provide capital to farms that buy equipment – and every tractor needs wheels and tires. Not surprisingly Titan’s consensus EBITDA for 2011 is $ 195 million growing to $ 255 million in 2012. This implies TWI is trading below 5x 2012 EBITDA.
Both Darling and Titan are opportunities to participate in the global food trend that could be around for some time to come.
Disclosure: I am long DAR.