We came across a long thesis on Darling Ingredients Inc (NYSE:DAR) on ValueInvestorsClub by BenHillGriffin. In this article we will summarize the bulls’ thesis on DAR. The company’s shares were trading at $41.56 when this thesis was published, vs. closing price of $34.69 on Jan 3rd.
Darling Ingredients Inc (NYSE:DAR) specializes in creating sustainable ingredients for various sectors, including pharmaceuticals, food, pet food, fuel, and fertilizers. They process animal by-products into different ingredients and also recover and convert used cooking oil and bakery scraps into feed and fuel components.
The bull thesis is based on the idea that the company’s legacy Food and Renewable Diesel (RD) businesses are near cyclical troughs that are not fully understood by the markets. The author argues that 2025 will bring favorable government actions to incentivize RD producers like Darling Ingredients Inc. (NYSE:DAR), including better mandates and higher rewards for RD derived from feedstock waste, which will significantly boost the margins of the company’s RD business. Another important argument of the thesis is the upcoming mandated usage of “Sustainable Aviation Fuel” (SAF) by many European countries – Darling Ingredients Inc (NYSE:DAR) is involved in a project to convert ~250 million gallons of RD per year into SAF, which can be sold at a significant premium to RD fuel. The author believes that this project alone will not only provide a $150+ million tailwind for the company’s FCF but might also drive a re-rating of the trading multiple. Lastly, the company has some optionality from supplying ingredients to certain drugs that attempt to mimic the effects of GLP-1 drugs – while this project is a long shot, it may materially impact the stock price if successful.
Besides the abovementioned arguments, the author also emphasizes that DAR has historically been an efficient capital allocator, which coupled with fading Capex requirements, could drive FCF to nearly triple. A target price range of $70 to $90 has been assigned to the stock, implying a potential upside of 102% to 159% from the current market price.
While we acknowledge the potential of DAR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DAR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.