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Despite the 42 percent year to date increase in the share price of Darling Ingredients Inc (NYSE: DAR), J.P. Morgan's Thomas Palmer believes that there is potential for significant upside going forward, driven by the improved pricing of end products.
Palmer upgraded the rating on the company from Neutral to Overweight, while raising the price target from $14 to $18.
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The analyst mentioned that there was potential for an “abrupt increase” in Darling Ingredients’ EPS in 2Q16 and beyond, with the end product price momentum expected to persist at least through 2016.
“Much Improved” Feed Business
“Although DAR mitigates some of its exposure to market prices through formula contracts, it remains heavily exposed to the price of yellow grease (a fat product), which fell from $0.34 per pound in mid-2014 to $0.17 in late 2015,” Palmer stated.
However, the prices have rallied since the beginning of 2016, with a one- to two-month lag between spot market prices and the company’s realized prices.
Therefore, management expects March price increases to flow through Darling Ingredients’ P&L from April.
“Thus, we now expect a rather abrupt and significant improvement in Feed segment profitability starting in 2Q,” the analyst explained.
End Product Pricing
According to the J.P. Morgan report, “The fat and protein price rally has coincided with 1) increased corn and soybean meal prices, 2) growing biomass-based diesel production, and 3) the institution of Low Carbon Fuel Standards in California.”
Consequently, the company’s fat products are currently priced at a premium. Although Palmer does not expect this price premium to continue, the analyst also does not expect these tailwinds to dissipate in 2017.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.