Decarbonization And Upcycling Will Empower Renewable Biofuel Markets

Key Takeaways

• Darling's strategic position in biofuels, feedstocks, and regulatory tailwinds is set to unlock durable revenue growth and significant long-term margin expansion.
  
• Emerging platforms in premium collagen, branded health ingredients, and global waste upcycling could drive transformative multi-year EBITDA growth and operational outperformance.
  
• Regulatory uncertainty, changing protein markets, high compliance costs, and emerging alternative technologies threaten profitability, margin stability, and future growth for Darling Ingredients.

Catalysts

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

• While analyst consensus expects policy adaptation such as 45Z and increased RVO mandates to gradually support margins, they may be underestimating the acceleration and magnitude of Darling's earnings leverage as full policy implementation combines with Darling's expanding domestic fat portfolio and leading feedstock position, creating the potential for both materially higher net margins and outperformance on adjusted EBITDA as early as 2026.
  
• Analysts broadly agree that demand and pricing for premium collagen peptides and new Food segment products like Nextida will drive improved margins, but they may be overlooking Darling's first-mover scientific leadership, strong early trial results, and the scale of the addressable market, setting the stage for an explosive ramp-up in Food Segment revenue and EBITDA, with the potential for a sustained multi-year growth curve and double-digit segment margin expansion.
  
• Darling is uniquely positioned to capitalize on the accelerating global movement towards decarbonization and sustainable biofuels, with regulatory tailwinds in both the U.S. and Europe likely to drive a step-change in feedstock demand, unlocking significant pricing power and long-term revenue growth, as well as a structural improvement in the company's earnings profile and cash flow generation.
  
• The formation of Nextida and Darling's innovation pipeline in specialty health and wellness ingredients, leveraging proprietary peptides with clinical validation, could catalyze the creation of a high-margin, branded ingredient platform-opening new revenue streams and driving premium multiples across Food and Feed Segments, with a transformative impact on overall EBITDA margins.
  
• As stricter global waste regulation and the expansion of the circular economy increase incentives for waste upcycling, Darling's international rendering and specialty ingredients footprint, coupled with ongoing industry consolidation, is likely to drive higher process volumes, improved operational efficiency, and elevated market share, underpinning robust long-term top-line growth and sustained margin expansion.

Darling Ingredients Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Darling Ingredients compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Darling Ingredients's revenue will grow by 5.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.8% today to 12.8% in 3 years time.
• The bullish analysts expect earnings to reach $860.7 million (and earnings per share of $5.46) by about August 2028, up from $105.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, down from 46.1x today. This future PE is lower than the current PE for the US Food industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Darling Ingredients Future Earnings Per Share Growth

Risks

• Increasing regulatory uncertainty, such as the unresolved timing and outcome of small refinery exemptions (SREs) and RIN recoveries, poses a significant risk to renewable fuel margins and could drive ongoing volatility in earnings and contribute to unpredictable shortfalls in revenue.
  
• Rising development and consumer adoption of plant-based and synthetic proteins, coupled with tightening ESG mandates scrutinizing animal-based industries, may suppress demand for animal by-products and increase compliance costs, leading to potential contraction in ingredient sales and margin pressure.
  
• High and sustained levels of capital expenditures are required both for growth (Nextida joint venture and capacity expansions) and for compliance with evolving environmental regulations, which could strain free cash flow and reduce net margins if growth or operating leverage does not accelerate as planned.
  
• Market entry of alternative waste management solutions and advances in technologies such as insect protein or precision fermentation threaten the traditional rendering market, presenting a risk that Darling's addressable market could shrink and top-line growth could stall or reverse.
  
• Darling's reliance on ongoing government policy support, such as RINs, LCFS credits, and biofuel blending mandates, exposes the company to regulatory risks that, if incentives are reduced or eliminated, could significantly depress renewable segment profitability and overall EBITDA.

Valuation

• The assumed bullish price target for Darling Ingredients is $60.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Darling Ingredients's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $6.7 billion, earnings will come to $860.7 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $30.69, the bullish analyst price target of $60.0 is 48.8% 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.