Goldman Sachs Upgrades DAR Despite Significant Risks

Loading...
Loading...

Despite the 42 percent year to date increase in the share price of Darling Ingredients Inc 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.

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.

Loading...
Loading...
date
ticker
name
Price Target
Upside/Downside
Recommendation
Firm
Posted In: Analyst ColorLong IdeasUpgradesPrice TargetAnalyst RatingsTrading IdeasJ.P. MorganThomas Palmer
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...