Sustainability is becoming increasingly important for investors, especially as the Environment Sustainability Governance (ESG) movement becomes not only a style of investing but an attribute to screen and rank stocks. Darling Ingredients, Inc. (NYSE: DAR) has been involved in the sustainability area since 1882, so it is safe to say they were ahead of the curve. Reusing and recycling are at the core of Darling’s business model back to its agricultural roots. The Irving, Texas-based company has a market cap of $12 billion and has been publicly traded since 1994.
Darling takes animal by-products, which are essentially the leftover parts once livestock has been through the butchering process, and recycles them to create both edible and non-edible ingredients such as gelatin, proteins, and animal feed ingredients, fats, and fertilizers. Its customers are mainly in the pharmaceutical, food, pet product, and fertilizer industries. The company also takes used cooking oil and bakery by-products and converts them into feeds and fuels. Darling also has a business segment that provides environmental services to the restaurant industry including grease trap collection and disposal. These highly specialized businesses require high degrees of institutional knowledge, equipment, and physical space, so the barriers to entry can be quite high. Darling has been an industry leader for decades, and its operations are global in reach.
Within the small to midcap food ingredient sector, Darling looks to be slightly undervalued with a price-to-earnings ratio (P/E) of 19.1 and EV/EBITDA of 11.3. Competitors with roughly similar market caps include McCormick (NYSE: MKC), Lamb Weston Holdings (NYSE: LW), and Flowers Foods (NYSE: FLO). McCormick has a P/E of 34.8 and an EV/EBITDA of 25.5, Lamb Weston has a P/E of 42.0 and EV/EBITDA of 19.9, and Flowers Foods has a P/E of 28.2 and EV/EBITDA of 15.5. If Darling were to simply trade in line with these peers, investors could realize some nice upside from current levels.
Darling is currently being covered by nine analyst firms, all of which have a Strong Buy rating on the stock. The average analyst price target for DAR is $97.11 which represents about a 30% upside from the current trading levels of around $75 per share.
As geopolitics continues to put upward pressure on oil prices, demand for biofuels such as those made by Darling Ingredients may be in higher demand. Darling’s businesses of reusing and recycling waste materials into usable products have been around for decades, creating serious moats against new competitors deciding to get into the animal rendering business. The ESG movement may shine new light on this old company, so investors should put it on their watch lists.
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