BMO Loses Appetite For Darling, Downgrades On South American Growth, Yellow Grease Prices

Darling Ingredients Inc DAR caught two downgrades Thursday despite having reported top- and bottom-line quarterly beats earlier in the week.

One of the analysts intimated his bearishness may be short lived.

The Rating

BMO Capital Markets analyst Kenneth Zaslow downgraded Darling Ingredients to Market Perform but raised his price target from $19 to $20.

The Thesis

By BMO’s assessment, the guided improvement in food and feed operating profit is too modest considering the firm’s $20 million contributions from capital projects and acquisitions.

Additionally, the analyst sees near-term headwinds in weak yellow grease, meat and bone prices; lagging growth in South America; and impact from 45 days of scheduled downtime at Diamond Green Diesel.

“Notably, the near-term weakness in Food and Feed largely will offset the contribution from DAR's expansions and bolt-on acquisitions,” Zaslow wrote.

Those expansions and acquisitions are still seen to contribute $23 million to $24 million in incremental earnings before interest, taxes, depreciation and amortization in 2018. They’re also expected to compound the effects of future capacity expansion at DGD, debt reduction and favorable legislation, the last of which is seen to create DGD margins around $1.25 per gallon.

Altogether, Zaslow’s long-term bullishness remains unchanged, and he anticipates 2018 EBITDA of $600 million.

Price Action

At time of publication, shares were down 3.6 percent at $17.52.

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