Darling Ingredients Inc. DAR has a better operating story after a sharp first-quarter recovery, but the case is mixed.
The shares combine stronger earnings, a discounted forward multiple and improving renewable-fuel conditions with elevated leverage and raw-material limits.
DAR’s Earnings Rebound Strengthens the Bull Case
Darling’s first-quarter results gave investors a clearer view of earnings power. Total net sales rose 12.3% year over year to $1.6 billion, and earnings were 83 cents per share, reversing a year-earlier loss.
Combined adjusted EBITDA more than doubled to $406.8 million from $195.8 million. Core ingredients execution, better finished-product pricing and a larger Diamond Green Diesel contribution all supported the rebound.
The recovery still needs context. The quarter included Darling’s share of a favorable lower-of-cost-or-market inventory adjustment of about $48.4 million at DGD, and management said that benefit has now been exhausted.
Darling currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Darling’s Valuation Offers a Relative Discount
DAR trades at 11.56X forward 12-month earnings. That is below 14.58X for its sub-industry, 17X for its sector and 20.41X for the S&P 500.
The discount supports the value argument, but it is not extreme versus the stock’s own history. DAR’s five-year median multiple is 11.92X, making the current valuation close to its normal range.
Valero Energy Corporation VLO is relevant because it is Darling’s Diamond Green Diesel partner. Its renewable diesel exposure provides context for DGD margin swings.
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DAR’s Cash Flow Has Yet to Match Earnings
Cash flow did not keep pace with earnings. Operating cash flow was $153 million in the first quarter, down from $249 million in the prior-year period.
The gap reflects timing issues. Darling contributed $190.1 million to DGD, mainly for short-term working-capital needs tied to margin calls, while production-tax-credit receipts are expected in later quarters.
Management expects much or all of the temporary DGD funding to be returned. Until then, the earnings rebound has not fully converted into balance-sheet flexibility.
Darling’s Leverage Keeps the Risk Elevated
Leverage remains the main restraint on the bull case. Darling ended the first quarter with total debt of $4.1 billion, net debt of about $4 billion and a preliminary leverage ratio of 3.17 times.
Management continues to target total debt of approximately $3 billion or less. That objective depends on stronger operating cash flow, DGD distributions, production-tax-credit collections and planned asset-sale proceeds.
The path is achievable only if the improved earnings environment turns into cash. Accounting earnings alone would do less to reduce financial risk.
DAR Faces Supply and Cost Constraints
Raw-material availability remains a structural issue. The North American cattle herd is at a multi-decade low, limiting access to beef-derived fats that can carry attractive renewable-fuel value.
Poultry volumes help offset supply pressure, but poultry yields less fat than beef. That limits upside when the best economics are tied to fats.
International markets add another risk. Tariff-related disruptions in Brazil, higher ocean freight costs and slower improvement in Europe could pressure margins if pricing or renewable-fuel economics soften.
Rising expenses also matter. Selling, general and administrative costs increased across segments in the first quarter, while corporate costs rose largely because of incentive compensation.
Bunge Global SA BG provides a useful comparison because it operates across agricultural commodities, oils, proteins, animal feed and biofuel-related supply chains. Its exposure shows how broader agricultural processors also face commodity and logistics swings.
Darling’s Neutral View Reflects Balanced Risks
The bottom line is that DAR looks improved, but not risk-free. The Neutral view and $66 price target fit a stock with better earnings momentum, a relative valuation discount and a renewable-fuel recovery, offset by debt and cash-flow questions.
No Zacks Rank or Style Scores are provided, so investors cannot make a report-grounded assessment of DAR’s Value, Growth, Momentum or VGM classifications. That limits the ability to apply factor-based signals to the stock.
Without those classifications, the decision rests more on execution. DAR needs to hold core margins, convert earnings into cash and reduce leverage for the rebound to become a stronger investment case.
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Darling Ingredients Inc. (DAR): Free Stock Analysis Report
Valero Energy Corporation (VLO): Free Stock Analysis Report
Bunge Global SA (BG): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).