Long-term shareholders have not been disappointed by natural-ingredients leader Darling Ingredients (DAR 0.72%). In the past 10 years, the stock has gained 73%, compared with 61% for the S&P 500. If you include dividends for the latter, though, that pushes total returns to 100% for the broader index.
Then again, the stock did pick up a new hobby in 2015: cliff diving. While it has bounced back to more respectable and appropriate levels in the past 18 months, the company has struggled to grow its top line in recent years. However, much of that was due to industrywide headwinds concerning selling prices for food, feed, and fuel -- all three of the company's business segments. And management isn't wasting any time positioning the company to take advantage of these three opportunities for continued growth.
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1. Swelling global middle class
The 30,000-foot view makes a solid argument for growth: The company is a leading provider of natural ingredients for food, feed, fuel, and pharmaceutical applications. It processes 10% of the world's animal by-products. As the global middle class swells, so will the production of animal fats and agricultural wastes, which leaves more opportunity for Darling Ingredients to keep chugging along.
Today, that means processing 1.08 million metric tons of food ingredients, 7.97 million metric tons of feed ingredients, and 1.18 million metric tons of fuel ingredients. But Darling Ingredients has adopted an ambitious strategy for expansion: It will only build, acquire, and develop businesses in geographies where it can secure a top-three market position within five years.
Is that possible? Well, 13% year-over-year revenue growth in the first quarter of 2017 seems to hint at what's possible when management executes and selling prices cooperate. Zooming in further shows an abundance of opportunities across existing business segments.
2. Renewable diesel
Perhaps the biggest single opportunity is the Diamond Green Diesel joint venture, which is finally on its feet and pumping out increasingly higher volumes of renewable diesel on its way to consistent and reliable operations at full capacity. It's expected to sell 160 million gallons of fuel in 2017, but capacity expansion will lift that to 205 million gallons and 275 million gallons in the next two years, respectively.
Investors are already enjoying the prize of improved operations. Darling Ingredients received a $25 million benefit from the investment in the first quarter of 2017 -- equal to the total from each of the past two years. Falling debt levels from the joint venture will lift the value of the fuels business even higher, and with more consistent performance.
The joint venture has been key to lifting operating cash flow in recent years, even as operating income has flatlined. Much of the extra cash has been applied to paying down debt, but those expedited efforts may only last another two years or so to hit certain earnings-to-debt ratios before management justifies making a splashier use of the cash.
DAR Cash from Operations (TTM) data by YCharts.
It's also worth pointing out that the renewable diesel created from the joint venture is identical to petroleum-based diesel. And because it's manufactured from renewable feedstocks -- animal fats and greases -- it garners the highest tax credits possible. That should make Diamond Green Diesel a perennial cash cow as long as the prices of inputs remain low and the tax credits remain in place.
3. Next-generation ingredients
In recent years, Darling Ingredients has ramped up investments in nontraditional, next-generation ingredients in industries that figure to provide a pretty solid runway for growth. One such partnership is nearing commercialization: insect protein for fish and animal feed. It fits perfectly within the company's core business and presents an amazing growth opportunity.
Although originally a partnership with EnviroFlight, the small start-up was acquired by engineered biology conglomerate Intrexon a few years ago. But that should be better for Darling Ingredients shareholders in the long run. Intrexon is loaded with cash, isn't afraid to find more financing, and is always looking to push the envelope. It also may be forced to pick up the pace on product revenue growth in the near future.
The pair are on working on building their first commercial-scale facility for producing black soldier fly larvae, which will be dried, crushed, and sold as protein into various feed markets. Specifics about the plant's size and capital requirements haven't been announced yet, but it's expected to be completed and shipping product in 2018. Better yet, a modular process makes it cheaper and easier to scale to ever larger volumes -- and do so more quickly than competitors in the alternative protein space. It could be a quick and significant growth opportunity for the company by the end of the decade.
What does it mean for investors?
Darling Ingredients hasn't always been the most consistent growth stock, but it has returned value to shareholders over the long run. The good news is that there are several opportunities for the stock to cash in on within the next several years, including the Diamond Green Diesel joint venture and next-generation ingredients. With an improving balance sheet and healthy cash flow, investors should be able to realize continued strong performance for the remainder of the decade at least.
