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Darling Ingredients Undervalued With Its Diamond Green Diesel JV Valued At Zero

Mare Evidence Lab profile picture
Mare Evidence Lab


  • Darling came under our radar due to the out-performance of the Diamond Green Diesel J.V for Valero in the Covid-19 environment.
  • It seems that the J.V is being given a zero value both for Valero and for Darling, while in Europe similar renewable diesel businesses are being given more reasonable multiples.
  • Moreover, their base business is also undervalued and Covid-19 resistant.
  • However, lacking a dividend means that price discovery could become the main mode of return, and given the somewhat speculative nature of their upside, Darling could become a portfolio clunker.
  • Nonetheless, Darling's J.V interest puts it at the intersect of a Covid-19 resistant, ESG and sum-of-parts undervaluation thesis.

The reason we think that Darling (NYSE:DAR) could be an interesting pick is to do with the latest results coming out of Valero Energy Corporation (VLO). With that release it became clear that the Diamond Green Diesel (DGD) J.V with Darling was the source of an expectations beat due to superior feed-stock flexibility compared to biofuel benchmarks. Based on questions in the earnings call, it became clear that renewable diesel was a bit of a dark horse for the analysts. But before price discovery could proceed for Darling which reported later, Valero with the rest of the markets continued to broil with the general market turmoil.

Diamond Green Diesel, which is ahead of almost any other refiner in capacity for renewable diesel, produced renewable diesel at immense margins even in the Covid-19 environment. Based on our analysis, this joint venture is being given essentially a zero value by US market actors where similar companies like Neste (OTCPK:NTOIF) are valued at more sensible multiples abroad, where regulatory regimes and margins are even less favourable. Along with this severe sum-of-parts undervaluation, we see downside protection in Darling's Covid-resistant core business, upon which Darling is solely being valued. Moreover, in the most secular of time horizons, we think that Darling will benefit from robust demographic trends and multiple expansion deserving of a sustainable waste management ESG play. Below we explain how Darling manages to be an unprecedented triple whammy of coronavirus resistant, severely under-priced and exposed to secular and ESG trends.

Secular Trends and the Base Business

Before discussing the DGD J.V, and why it should be considered a valuable investment, we need to cover why the base business already justifies a higher valuation, especially in this environment. As the most straightforward point, we begin with the secular argument.

Secular Tailwinds for Base

This article was written by

Mare Evidence Lab profile picture
Buy-side hedge professionals conducting fundamental, income oriented, long term analysis across sectors globally in developed markets. Please shoot us a message or leave a comment to discuss ideas.DISCLOSURE: All of our articles are a matter of opinion, informed as they might be, and must be treated as such. We take no responsibility for your investments but wish you best of luck.

Analyst’s Disclosure: I am/we are long DAR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

Joshua Heller profile picture
How does the demand picture stack up in the short to medium term for renewable diesel? It seems like a lot of supply is potentially coming online in the US. Is there a risk that this supply increases too fast compared to demand and weakens or wrecks margins in the future? Thank you for the great article on DAR.
Mare Evidence Lab profile picture
It seems that supply will be relatively contained for the next couple of years. 2025 is when capacity will have grown quite a bit more. Still not enough to meet the supply deficit locally (US net importer by substantial margin). Thankfully, besides HFC, US competitors' attempts to start up here have been hampered. These facilities take a while to build up. Eventually margins will be driven down, but by then the size of the business will be much larger so that on the current multiple, which already assumes much lower ROIC, there is a lot of upside.

As for demand, we're not worried. The whole oil situation seems to be normalising already. We don't even need a full recovery given the excess demand buffer.
Joshua Heller profile picture
Are there any free or low cost sources I can use to track supply / demand picture that you are aware of? I am in your camp that supply will not catch up with demand in the short term. I am just unsure of how far that runway is and when it pressures margins. If it isn't until 2025 or longer, that would make me very bullish.
Mare Evidence Lab profile picture
Not that we're aware of. We've just manually gotten an overview of who the big players are and the timelines on their projects.
Helpful detailed article.
Good article.

Only nit i'd pick is the dividend focus - DAR are already buying back stock (bought $55M in Q1) which, i think, is better than a dividend given the stock is undervalued. They'll deleverage a little bit more over the next 12 months (targeting investment grade rating), but once the DGD expansion comes online late next year the market will have no choice but to ascribe value to the cash flow.
Mare Evidence Lab profile picture
Fair point. Buybacks are nice too!
Great Article!
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