Renewable Diesel And Collagen Peptides Will Secure Future Opportunities

Key Takeaways

• Transition to renewable fuels and tax incentives expected to enhance margins and future earnings across segments.
  
• Debt reduction efforts and favorable pricing in feedstock and new products aim to boost revenue and net margins.
  
• Challenges from tax credit changes, supply chain issues, and tariffs create potential risks to Darling Ingredients' margins and earnings in both Fuel and Food segments.

Catalysts

Develops, produces, and sells natural ingredients from edible and inedible bio-nutrients in North America, Europe, China, South America, and internationally.

• The transition and adaptation to policies such as 45Z, along with the anticipation of securing tax credits for renewable diesel and SAF, are expected to enhance margins and therefore contribute to higher future earnings.
  
• The stabilization and expected improvement in feedstock pricing coupled with higher fat prices are projected to positively impact revenue, particularly through the company's Feed Ingredients segment.
  
• The rebound in sales and growth in demand for Collagen peptides and new products like Nextida glucose moderation collagen peptide are anticipated to drive improved margins and earnings for the Food segment.
  
• Expectations of changes in policy, such as the increased RVO mandate, could lead to higher RIN prices, enhancing margins in the renewable fuels sector, and thereby positively impacting overall earnings.
  
• The company's ongoing debt reduction, with a significant pay down in Q1 2025, is set to lower financial leverage, which in turn should improve net margins and potentially boost earnings.

Darling Ingredients Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Darling Ingredients's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 9.2% in 3 years time.
• Analysts expect earnings to reach $586.3 million (and earnings per share of $3.91) by about April 2028, up from $171.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 29.7x today. This future PE is lower than the current PE for the US Food industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 2.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Darling Ingredients Future Earnings Per Share Growth

Risks

• The transition from the blender's tax credit to the producer's tax credit resulted in a lower value per gallon and has temporarily impacted both sales and feedstock eligibility, potentially affecting net margins and earnings for the Fuel segment.
  
• DGD experienced a challenging first quarter with lower-than-expected margins due to supply chain redirections, contract modifications, and turnaround activity, which could continue to impact earnings if these issues aren't resolved.
  
• Tariffs are creating an uncertain environment for imported feedstocks, adding complexity and potential cost pressure that could impact net margins and earnings.
  
• The Food segment's total sales decreased compared to the previous year, despite improved margins, which could imply potential risks to overall revenue.
  
• The overall company's net loss for the first quarter is concerning, compared to a net income in the prior year's quarter, indicating potential risks to future earnings if similar conditions persist.

Valuation

• The analysts have a consensus price target of $47.798 for Darling Ingredients based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $34.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.4 billion, earnings will come to $586.3 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $32.2, the analyst price target of $47.8 is 32.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.