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Darling Slaughtered

OK, so I was pretty hot on the prospect of this funky, messy little company called Darling International (AMEX: DAR  ) a while back. This is the biz that takes what's left of the cows that we eat and turns it into other useful substances. From an investing standpoint, I liked that it was a bizarre, even distasteful business, with an improving balance sheet, growing earnings, and positive cash flow.

That's all gone now. Business, to be blunt, stinks as bad as cow flop. While I'm not one to quote press releases, the company's recent earnings announcement pretty much summed it all up: "Adverse operating conditions, including a further decline in raw material volumes, lower finished product prices, and continued high relative prices for diesel fuel and natural gas, made for a very challenging first quarter."

In other words, there aren't enough aging cows to slaughter, the prices being paid for its end products are weak, and high fuel prices are hurting the bottom line. The company also cited poor weather as the reason for a decline in its restaurant-servicing segment. All of these problems are beyond the company's control, which also means there's no telling when things will pick up again. That's one of the downsides of being in a commodity-driven business.

Take a look at this chart comparing the financials from last November to today:

Trailing-12-Month Financials 11/22/04 6/21/05
Free Cash Flow (in $ Million) $35.60 -$10.08
Net Margin 6.32% 3.46%
Return on Equity 39.85% 17.66%
Revenue Growth 18.00% -43.9%
Earnings Growth 33.00% -27.5%

Needless to say, decreasing sales, lower margins, and negative free cash flow are not promising signs. All the conditions the company needs to grow -- nice weather, low fuel prices, and favorable cattle "demographics" -- have not come to pass. That doesn't mean they won't, and if they do, things could turn around very quickly for Darling. It also doesn't look as if the company will be going bankrupt, either. But for now . well, I just don't see as compelling a case to buy as I once did. Maybe it's time to switch to chicken over at Sanderson Farms (Nasdaq: SAFM  ) , Tyson (NYSE: TSN  ) , or Pilgrim's Pride (NYSE: PPC  ) .

To check out more beefed-up discussion about Darling:

Fool contributor LawrenceMeyers is not the only Fool on the lookout for small companies with enormous potential. Co-founding Fool Tom Gardner brings you his best recommendations each and every month in hisMotley Fool Hidden Gems newsletter.

Lawrence Meyers owns none of the stocks mentioned in this article and, as you can see, can easily make mistakes when evaluating stocks -- so supplement his thoughts with your own research!

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