Goldman Sachs 'Disappointed' By Darling Ingredients' EBITDA Outlook, Moves To Neutral

Food supplier Darling Ingredients Inc DAR reported Wednesday after the close with fourth-quarter net income of $105.7 million — 63 cents per GAAP-diluted share — as well as $952.5 million in revenue and adjusted EBITRDA of $115.8 million. 

The Analyst

Goldman Sachs analyst Adam Samuelson downgraded Darling Ingredients from Buy to Neutral and lowered the price target from $20 to $19, suggesting 4-percent upside potential.

The Thesis

Despite Darling Ingredient's base Q4 EBITDA coming in 3 percent above Goldman's estimate and management commentary suggesting 2018 gross margin above the research firm's expectations, the 2018 outlook for roughly flat EBITDA in the base business is disappointing, Samuelson said in a Wednesday note. (See the analyst's track record here.) 

The muted EBITDA outlook comes despite the recent growth investments, a notably higher base business capex outlook in 2018 and the increasing possibility of Darling going ahead with a $550-million Phase III expansion of the Diamond Green Diesel joint venture, Samuelson said.

This, according to the analyst, reduces his confidence in a large free cash flow inflection after the DGD Phase II expansion, which is set for completion in mid-2018. 

With an "underwhelming" base business outloook and "less attractive" valuation risk-reward after the Q4 print, Goldman is moving to the sidelines, the analyst said. 

The firm lowered its 2018-2019 EBITDA estimates by 5 percent.

The Price Action

Darling Ingredients shares were up about 40 percent over the past year until Wednesday. 

At the time of publication, the shares were shedding 5.94 percent to $17.10. 

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