Darling Is A Decent Hedge Against A Biden Win, A Multibagger With More Renewable Diesel Visibility

Summary

• Darling's renewable diesel production, based on very sustainable feedstock relative to competitors, is both Dem-friendly while being not too opposed to big oil interests.
• Moreover, the value proposition we discussed last time is still present.
• With greater regulatory support, Darling's visibility could seriously increase in the marketplace, and it could become a renewable multi-bagger with more renewable diesel credibility.

Darling Ingredients (NYSE:DAR) is one of our more successful investments to date, as reflected by the performance report on our Top Idea article on it from a few months ago. Although the performance has already been good, we think there are still reasons to get involved in the stock. Firstly, it's a good hedge for the election outcomes, and secondly, it remains well below our price target and is still highly invisible to the analyst community. The fact is that the JV is still not being valued much at all, with a portion of the price recovery attributable to the base foods and feed business. With more regulatory support, the stock could get into momentum territory and end up being a multi-bagger for current holders.

Strong Q2 Justifies Price Recovery

Before we discuss the Darling prospects, it's worth mentioning that the Q2 performance was already pretty good. With Q1 demonstrating resilience at the beginning of lockdowns, Q2 was absolutely more resilient. In the feed and foods segment, sales rose, with no organic declines in operating profitability. Much of the recent price performance might be attributed to this segment of the business, which had some concerns due to the Chinese exposure in March and April.

(Source: DAR Q2 2020 Presentation)

Moreover, the fuel segment saw substantial increases in both sales and margins too, thanks in part to the resilience of regulatory diesel markets in the downturn. Moreover, the CAPEX reductions by other major oil players have also meant reduced labour costs in building out the new DGD Port Arthur plant.

Regulatory Support

Beyond reduced CAPEX requirements in upcoming construction thanks to the less competitive oil project development market, there is also the matter of regulatory support to boost the project IRRs. Regulatory support will need to improve to be able to support momentum in Darling's price, even though without it, Darling still has low enough breakevens for the new plants to be economical. There is promise, however, in broadening fuel standards in relevant markets abroad. Canadian environmental authorities are seeking a substantial programme to increase use of clean liquid fuels through the Clean Fuel Standard. If all goes well, this would be approved by 2022, long before 2024 when a lot of new competitors renewable diesel capacity comes online. Similar plans are continuing to develop in Europe.

Moreover, federal support for the renewable fuel standard, the BTC or other means of maintaining incentives to use renewable diesel could become instituted in the even of a Biden presidency. We know that a Biden win will affect corporate tax rates, likely to a substantial degree, so having exposure to stocks that are Dem-friendly while also not being completely in opposition of the still powerful oil lobby is a good way to manage risk.

Risks and Conclusions

There are still risks to a Darling investment. Firstly, they are only a portion of renewable diesel producers, where others like Neste (OTCPK:NTOIF) produce renewable diesel using feedstocks of questionable sustainability. If these other producers become the focus as regulatory approval is supposed to mount, this could be an issue for the demand side of the equation. Nonetheless, our model still points to a lot of upside even when comparing to an inferior competitor.

(Source: Mare Research Database)

With the potential of joining the sustainability conversation in the event of a larger political push, perhaps accelerated by a Biden win, for clean and renewable fuel standards, Darling could gain some more mass-market. If that starts to happen, you'd have a potential multi-bagger on your hands.

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.