SAF Expansion And Tax Credits Will Strengthen Future Market Position

Key Takeaways

• Regulatory support through the Clean Fuel Production Tax Credit and focus on low CI feedstocks boost Darling Ingredients' revenue potential.
  
• Strategic expansion into Sustainable Aviation Fuel and disciplined capital management could drive growth and improve earnings per share.
  
• Decreased sales, income, and leverage ratio concerns highlight risks in future revenue, profitability, and regulatory reliance at Darling Ingredients.

Catalysts

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

• The implementation of the 45Z Clean Fuel Production Tax Credit provides a favorable regulatory environment, enhancing the value of domestic waste fats and positioning Darling Ingredients as a leader in low CI (carbon intensity) feedstocks, which could enhance future revenue through better pricing and demand.
  
• Effective cost management and operational excellence have led to margin improvements in several segments, including an increase in gross margins in both the Feed and Food segments. This suggests potential for improved net margins and earnings.
  
• The ongoing monetization of the Clean Fuel Production Tax Credit is expected to deliver additional income, enhancing earnings potential as the market stabilizes and regulatory changes provide clarity on biofuel policies.
  
• Darling Ingredients' strategic expansion into Sustainable Aviation Fuel (SAF) presents an opportunity for increased revenue. The successful startup of their SAF unit ahead of schedule indicates potential for growth in this high-demand sector.
  
• The company's focus on disciplined capital deployment and debt reduction, evidenced by significant debt paydown and maintained plans for further reduction, supports improved financial health and could enhance earnings per share (EPS) through lower interest expenses.

Darling Ingredients Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Darling Ingredients's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $603.0 million (and earnings per share of $4.03) by about March 2028, up from $278.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, down from 16.8x today. This future PE is lower than the current PE for the US Food industry at 17.3x.
• Analysts expect the number of shares outstanding to decline by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

Darling Ingredients Future Earnings Per Share Growth

Risks

• The company experienced a decrease in net sales and operating income in fiscal year 2024 compared to 2023, mainly due to lower gross margins and fat prices. This could negatively impact future revenue growth and profitability.
  
• Darling Ingredients’ net income significantly decreased in 2024 compared to 2023, which could raise concerns about the company’s ability to maintain or grow its earnings.
  
• While Darling Ingredients received cash dividends from its joint venture, Diamond Green Diesel, the sustainability of these dividends could be at risk if there are regulatory changes or market shifts, potentially affecting future earnings.
  
• There is significant reliance on regulatory conditions, such as the 45Z Clean Fuel Production Tax Credit, and any adverse changes in these regulations could impact the company’s revenue and profitability.
  
• The company’s leverage ratio is currently high, and while they have made progress in reducing debt, ongoing financial health depends on continued effective debt management and may impact net margins.

Valuation

• The analysts have a consensus price target of $51.181 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 $65.0, and the most bearish reporting a price target of just $43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.1 billion, earnings will come to $603.0 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.4%.
• Given the current share price of $29.52, the analyst price target of $51.18 is 42.3% 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.