Innovations And Decisive Expansions Poised To Propel Growth Across Segments

Key Takeaways

• Rising demand for low carbon intensity feedstocks and innovation in product offerings like Nextida.GC indicate potential revenue growth in Feed and Food segments.
  
• Expansion into sustainable aviation fuel and strategic financial management aimed at improving net margins and financial health suggest a growth-oriented and efficient operational focus.
  
• Darling Ingredients faces risks to revenue and net margins from a deflationary ingredients market, renewable diesel market uncertainties, and fluctuating demand in key segments.

Catalysts

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

• Improving global fat pricing indicates rising demand for low carbon intensity feedstocks for renewable diesel, likely enhancing revenue growth in the Feed Ingredients segment by improving margins due to adjustments in raw material procurement arrangements.
  
• The launch of Nextida.GC, a natural collagen solution for managing glucose moderation, signals potential revenue growth in the Food segment through innovation and expansion in product offerings, benefiting from increased customer engagement and demand.
  
• Receipt of dividends from Diamond Green Diesel (DGD) and the focus on operational excellence and cost-cutting measures are operational strategies aimed at improving net margins and overall financial health, impacting debt repayment and share repurchase plans positively.
  
• Expansion in the sustainable aviation fuel market, with the unit moving ahead of schedule and on budget, expected to start in Q4 2024, suggests potential for significant revenue growth in the Fuel segment through new domestic and international supply opportunities.
  
• Management's commitment to controlling capital spending, alongside strategies for improving gross margins and paying down debt, reflects a forward-looking approach to enhancing earnings through prudent financial management and operational efficiency.

Assumptions

• Analysts are assuming Darling Ingredients's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.0% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $634.4 million (and earnings per share of $4.24) by about August 2027, up from $369.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $836.4 million in earnings, and the most bearish expecting $523 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, down from 17.8x today. This future PE is lower than the current PE for the US Food industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The deflationary and volatile global ingredients market presents a risk to Darling Ingredients' revenue and net margins due to fluctuating demand and pricing pressures.
  
• Overcapacity and an uncertain regulatory environment in the renewable diesel market could lead to reduced demand for Darling's products, impacting earnings.
  
• Feed Ingredients segment depends heavily on global raw material volumes and fat pricing; any adverse changes could negatively affect Darling's margins and revenues.
  
• The Food segment's reliance on customer demand for gelatin and hydrolyzed collagen, which has shown signs of slowing, could lead to decreased sales and earnings.
  
• Darling Ingredients' Fuel segment faces challenges with margin pressures due to unclear regulatory markets for RINs and LCFS, potentially affecting profitability.

Valuation

• The analysts have a consensus price target of $55.54 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 $70.0, and the most bearish reporting a price target of just $42.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.7 billion, earnings will come to $634.4 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $41.46, the analyst's price target of $55.54 is 25.3% 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.