Energy

Renewable Diesel Could Bring 50% Upside to Darling Ingredients' Stock

Jon C. Ogg

Published: September 29, 2020 11:35 am

When it comes to daily upgrades and downgrades, sometimes it is best to step back and review how the companies are looking long term rather than just in the daily moves. One such company is Darling Ingredients Inc. (NYSE: DAR). The company is not as well known to the investing public as some of the other players in alternative and renewable energy efforts, but it actually has a $5.5 billion market cap.

Credit Suisse’s Manav Gupta initiated Darling Ingredients with an Outperform rating and a $50 price target on September 28. The analyst sees Darling as a unique opportunity, in that it should attract incremental fund flows from ESG (environmental, social and governance) investors and traditional energy investors alike.

According to Gupta, Darling Ingredients is one of the few energy companies with earnings that are expected to grow handily in the next five years as two key renewable diesel projects come online. The firm sees Darling transforming itself from a rendering company to one of the world’s largest and most efficient low-cost producers of renewable diesel.

One reason the company is less known is that it has been transforming its operations. The Irving, Texas-based company used to be known as Darling International before changing its name in 2014. It also dates back to before 1900. Darling Ingredients was mostly tied to animal rendering in 2015, and its fuel segment made up only 9.6% of total earnings before interest, taxes, depreciation and amortization (EBITDA) at that time.

By 2022, after the Diamond Green Diesel expansion comes online in St. Charles, Credit Suisse now expects that the company’s Fuel segment will represent about 63% of its total EBITDA.

Another longer-term boost will come from the Port Arthur renewable diesel facility coming online by 2024. At that point, the Fuel segment will represent 70% to 75% of EBITDA.

The Credit Suisse report also talked up a partnership with Valero Energy Corp. (NYSE: VLO) that gives the Diamond Green Diesel joint venture a competing edge over most of the other greenfield renewable diesel projects being pursued by competitors.

The report also talks up Darling’s diversification strategy. Its Feed and Food segments offer diversification and they offer an earnings stream that are not tied to the energy markets where fundamentals remain challenging. Gupta pointed out that the Feed and Food segments are providing earnings stability, but it is the effort in renewables that will drive its growth. This should sum up the basis for Gupta’s view on its long-term earnings power: “After both of the renewable diesel projects have started up, the Diamond Green Diesel joint venture could pay $450 million to $500 million in annual distributions to Darling Ingredients.”

The Credit Suisse report noted that the investment in Peptan is also an attractive growth opportunity.

Credit Suisse’s view is that there is already more reward opportunity than there is risk. The base-case of $50 comes with a $56 “blue sky” scenario in which the operations outperform expectations. The “grey sky” scenario still generates a sum of the parts analysis after net debt at $28.

Where this call gets interesting is that Darling Ingredients’ stock was closer to $28 a share before the COVID-19 instant recession and fears knocked the legs out from under the bull market. Its stock went down under $15 at the peak of the panic selling mania in March, and it recaptured $28 by mid-summer. Darling Ingredients stock was last seen trading up at $34.00, and its 52-week high is $36.09.