Executive Summary / Key Takeaways

• Strategic Pivot in Progress: Darling Ingredients has effectively decoupled its investment narrative from volatile renewable fuels by withdrawing combined EBITDA guidance and focusing exclusively on its core ingredients business, which delivered its strongest quarterly performance in 1.5 years with Feed segment EBITDA up 32% and Food segment EBITDA up 26% year-over-year in Q3 2025.

• Free Option on Policy Recovery: While Diamond Green Diesel posted negative EBITDA of $3 million in Q3 due to policy delays and $38 million in LCM charges, the joint venture's 1.2 billion gallon capacity and integrated feedstock model represent a powerful lever that requires only regulatory clarity—not operational fixes—to unlock substantial cash flows, creating asymmetric upside for patient investors.

• Competitive Moats Remain Intact: The company's 60% North American UCO market share, vertical integration from collection to fuel production, proprietary rendering technology, and regulatory expertise create durable barriers that competitors cannot easily replicate, particularly as feedstock supply chains rebalance in Darling's favor.

• Valuation Disconnect: Trading at 0.99 times sales and 1.23 times book value—both near five-year lows—the market is pricing DAR as a distressed commodity play while ignoring the structural improvement in its core ingredients margins and the policy optionality embedded in its fuel segment.

• Balance Sheet Repair Underway: With leverage declining to 3.65x from 3.93x year-end, $300 million in production tax credits expected in 2025, and management committed to reaching 2.5x leverage, the company is strengthening its financial foundation while maintaining strategic flexibility.

Setting the Scene: The Circular Economy's Quiet Leader

Darling Ingredients, founded in 1882 in Irving, Texas, has spent 140 years building what may be the most underappreciated circular economy platform in public markets. The company transforms animal by-products and used cooking oil—waste streams that would otherwise create environmental liabilities—into high-value feed, food, and fuel ingredients. This isn't recycling as a marketing slogan; it's a vertically integrated industrial system that captures value at every stage from grease trap collection to renewable diesel production.

The business operates across three segments that tell very different stories. The Feed Ingredients segment (60% of sales) processes animal fats and proteins into ingredients for animal feed, pet food, and aquaculture. The Food Ingredients segment (22% of sales) produces collagen, gelatin, and natural casings for pharmaceutical, nutraceutical, and food applications. The Fuel Ingredients segment (9% of sales) houses the company's 50% stake in Diamond Green Diesel (DGD), a joint venture with Valero (VLO) that converts waste fats into renewable diesel and sustainable aviation fuel.

This segment mix explains why Darling's stock has languished despite operational improvements. For years, the DGD joint venture was the growth story, promising to convert the company's massive waste fat collection network into premium renewable fuel margins. When DGD worked, it worked spectacularly. When policy headwinds hit—as they have in 2025 with RVO delays, SRE uncertainty, and weak LCFS pricing—the entire company gets painted with the same brush. Yet beneath the fuel segment's struggles, the core ingredients business has been quietly strengthening, and Q3 2025 marked an inflection point where this strength became undeniable.

Business Model: The Integrated Waste-to-Value Chain

Darling's competitive advantage begins with its collection network, which captures 60% of North America's used cooking oil and processes approximately 12 million metric tons of animal by-products annually. This scale creates a cost structure that pure-play renderers cannot match. When a restaurant needs grease trap service, Darling's trucks are already in the neighborhood. When a meat processor needs by-product removal, Darling's rendering plants are within efficient transport distance. This density translates into lower collection costs, higher asset utilization, and a reliable feedstock supply that insulates the company from the commodity price volatility that plagues crop-based competitors like ADM (ADM) and Bunge (BG).

The integration extends beyond collection. Darling doesn't just sell raw fats and proteins—it processes them into value-added ingredients with applications across multiple end markets. Feed-grade fats become premium animal nutrition. Food-grade collagen serves pharmaceutical and nutraceutical customers willing to pay for quality and traceability. Non-food grade oils feed the DGD joint venture, creating a captive customer for lower-quality feedstocks that might otherwise be sold at commodity prices.

This vertical integration creates a powerful margin buffer. When fat prices are weak, the Feed segment benefits from lower input costs. When fat prices are strong, the company captures upside through its Food and Fuel segments. In Q3 2025, this dynamic was on full display: Feed segment gross margins expanded to 24.3% from 21.5% year-over-year, driven by higher fat prices that simultaneously strengthened the Food segment's gross margins to 27.5% from 23.9%. The integrated model ensures that value captured at one stage doesn't leak out at another.

Technology and Differentiation: Proprietary Processing Meets Policy Expertise

Darling's technological moat isn't software—it's proprietary processing technology that extracts maximum value from perishable waste. The company's rendering processes achieve yields that competitors cannot replicate, turning what others might discard into saleable products. Rendering is a scale game where a 2-3% yield advantage flows directly to the bottom line. In a business processing millions of metric tons annually, small efficiency gains translate into tens of millions in incremental profit.

The DGD joint venture represents a different form of technological advantage: process integration. By co-locating with Valero's refineries and designing plants specifically for waste fats, DGD achieves conversion efficiencies that standalone renewable diesel producers cannot match. The Port Arthur plant's recent upgrade to produce sustainable aviation fuel from 50% of its 470 million gallon capacity demonstrates this technical flexibility. When margins support it, DGD can switch between renewable diesel and SAF to capture the highest-value market.

Darling's most underappreciated asset is its regulatory expertise. Navigating the Renewable Fuel Standard, Low Carbon Fuel Standard, and production tax credit programs requires specialized knowledge that took years to develop. The company's ability to optimize feedstock sourcing for credit qualification and its relationships with policymakers create a barrier to entry that new competitors cannot easily overcome. This expertise explains management's confidence that current policy headwinds are temporary—they understand the mechanics well enough to see that the EPA's September 2025 supplemental proposal could be constructive, suggesting higher feedstock prices and wider biofuel margins ahead.

Financial Performance: Core Strength Masked by Fuel Noise

The Q3 2025 results tell a story of two businesses moving in opposite directions. The core ingredients segments generated a combined $246 million in EBITDA, with Feed contributing $174 million and Food adding $72 million. This represents a 32% increase in Feed EBITDA and a 26% increase in Food EBITDA year-over-year. Gross margins expanded meaningfully in both segments, driven by higher fat prices, strong execution, and the absence of contingent consideration expenses that had weighed on prior-year results.

Meanwhile, the Fuel segment posted a negative $3 million EBITDA contribution from DGD, a dramatic swing from the positive $39 million in Q3 2024. The culprit wasn't operational failure but rather a perfect storm of policy delays, a scheduled DGD3 turnaround, and $38 million in lower-of-cost-or-market (LCM) charges. Management noted that "both LIFO and LCM were negative in the third quarter, which is unusual and does not typically happen for extended periods." This signals that the accounting impact is temporary, not structural. When RIN and LCFS pricing recovers, these charges reverse, creating a potential earnings tailwind.

The nine-month picture reinforces the core business strength. Through September 2025, Feed segment operating income reached $151 million, up from $144 million in the prior year, despite processing slightly lower volumes (9.32 million vs 9.34 million metric tons). Food segment operating income jumped to $126 million from $109 million, driven by higher sales volumes and fat prices. These improvements occurred while the company integrated recent acquisitions like Gelnex and Miropasz, suggesting operational leverage that should become more pronounced as integration costs fade.

Capital Allocation: Deleveraging While Maintaining Optionality

Darling's June 2025 debt refinancing reveals management's strategic priorities. The company upsized its Eurobond to €750 million at a fixed 4.5% rate for seven years and established $2.9 billion in new senior secured credit facilities, replacing more expensive debt. This reduced interest expense by $9.9 million in Q3 alone and brought the leverage ratio down to 3.65x from 3.93x at year-end.

Management's commitment to reaching 2.5x leverage signals a disciplined approach that prioritizes financial stability over aggressive expansion.

The production tax credit monetization strategy demonstrates capital allocation flexibility. Darling expects to generate $300 million in PTCs in 2025, with $200 million received by year-end and the balance in early 2026. These credits, combined with the $130 million dividend received from DGD in Q1, help offset the $245 million in contributions the company has made to the joint venture. Darling can extract cash from its fuel investment even when operational margins are weak, reducing the risk of a capital drain.

Capital expenditures of $224 million through nine months reflect maintenance of the core business and strategic projects like the Port Arthur SAF upgrade. The expected $125 million in additional capex for the remainder of 2025 suggests management is investing in growth while still prioritizing debt reduction. This balance is crucial for a company trading at valuation multiples that demand both growth and financial discipline.

Competitive Context: Scale and Integration Versus Diversification

Comparing Darling to agribusiness giants reveals both strengths and vulnerabilities. Archer-Daniels-Midland, with its 20-25% share in global grain and oilseed processing, dwarfs Darling's 15% global by-product market share. ADM's Q3 2025 adjusted net earnings of $448 million and projected full-year EPS of $3.25-$3.50 reflect a more diversified and currently more profitable business. However, ADM's 6.22% gross margin pales against Darling's 23.58%, highlighting the value of waste-based feedstocks versus crop-based commodities.

Bunge's 10-15% oilseed market share and Q3 EPS of $2.29 demonstrate similar scale advantages, but its 5.69% gross margin tells the same story as ADM. Both companies are exposed to crop price volatility and trade disruptions that Darling's waste-based model largely avoids. When soybean oil prices spike, ADM and Bunge face margin pressure while Darling benefits from substitution demand for its animal fats and UCO.

Ingredion (INGR) presents a different comparison. Its 25.43% gross margin and 13.82% operating margin show that specialized ingredients can command premium valuations. Darling's Food segment, with its collagen and gelatin products, competes directly in this high-margin space. The Gelnex acquisition positions Darling to capture growing demand for clean-label, functional ingredients, though Ingredion's 8.60% return on assets currently exceeds Darling's 2.18%.

Tyson Foods (TSN)' integrated rendering operations make it a direct competitor in the Feed segment, but Tyson's 0.87% profit margin reflects the challenges of its branded protein business. Darling's independent collection model provides flexibility that Tyson's captive supply cannot match, particularly in sourcing UCO from third-party restaurants and food processors.

Outlook and Execution: Policy Catalysts and Operational Leverage

Management's guidance shift is the most significant strategic development. By withdrawing combined EBITDA guidance and focusing exclusively on core ingredients ($875-900 million EBITDA for 2025), Darling is telling investors to value the company on its stable, profitable operations and treat DGD as upside optionality. This reframes the investment thesis from a risky biofuel play to a defensive ingredients business with a free call option on policy recovery.

The Q4 2025 outlook supports this pivot. Management expects Feed segment performance to be consistent or slightly up, while the Food segment should be stronger, driven by new product launches and the Nextida joint venture. The formation of Nextida with Tessenderlo Group, in which Darling will hold an 85% stake, creates a collagen and gelatin powerhouse positioned to accelerate growth in health and wellness markets. The planned "Nextida Brain" launch in late 2026 provides a visible growth catalyst.

For DGD, the path to recovery depends on policy clarity. The EPA's September 2025 supplemental proposal suggests the agency recognizes the need for higher feedstock prices and wider biofuel margins. Management believes that large oil companies running at losses to produce their own RINs is unsustainable and expects this dynamic to reverse in 2026-2027. When it does, DGD's 1.2 billion gallon capacity and integrated feedstock supply will generate substantial cash flows. Until then, the company can idle DGD1 and run DGD2 and DGD3 at reduced rates, minimizing losses while preserving optionality.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is prolonged policy uncertainty. If RVO enforcement continues to be delayed and SRE clarity remains elusive, DGD could remain a drag on earnings and cash flow longer than expected. The $200 million in Darling contributions to DGD through Q3 2025 demonstrates the potential for capital drain, though PTC monetization largely offsets this. A government shutdown or change in administration could further delay policy resolution, extending the timeline for margin recovery.

Commodity price volatility poses a risk to the core ingredients business. While higher fat prices boosted Q3 margins, a sudden drop could reverse those gains. However, the company's integrated model provides some natural hedge: lower fat prices would hurt Feed segment revenue but reduce input costs for Food and Fuel segments. The bigger concern is protein demand, where tariff impacts from China and APAC countries have pressured value-added poultry products. Export protein demand is showing signs of recovery, but a renewed trade war could derail this improvement.

Debt levels remain elevated at 3.65x leverage, though trending down. The company's $4.01 billion net debt position limits strategic flexibility and creates interest expense headwinds. While the June 2025 refinancing reduced rates and extended maturities, the commitment to reach 2.5x leverage will require continued EBITDA growth and debt paydown, potentially constraining acquisition activity or shareholder returns.

Execution risk on the Nextida joint venture could disappoint. While the combination of Darling's Rousselot and Tessenderlo's PB Leiner brands creates a global collagen leader, integration challenges and cultural differences could delay synergy realization. The promised "accelerated growth in health and wellness" depends on successful product development and market penetration.

Valuation Context: Pricing the Core and the Option

At $36.51 per share, Darling trades at 0.99 times sales and 1.23 times book value, both near five-year lows. This valuation implies the market sees little growth and significant risk, yet the core ingredients business is generating $875-900 million in EBITDA with expanding margins. The enterprise value of $10.02 billion represents 11.60 times EBITDA, reasonable for a stable ingredients business with market leadership positions.

The P/E ratio of 54.49 appears elevated but reflects the temporary drag from DGD losses and LCM charges. Excluding the fuel segment's impact, the core business trades at a much more attractive multiple. Ingredion, with similar gross margins (25.43% vs Darling's 23.58%), trades at 10.80 times earnings and 0.96 times sales, suggesting Darling's core ingredients business should command a comparable or higher multiple given its market share and integration advantages.

Analyst sentiment supports this view. With 13 "buy" or "strong buy" ratings and a median price target of $45—32% above current levels—the professional consensus sees upside driven by core business strength and eventual fuel segment recovery. The key is that investors need not pay for the DGD optionality; it's included for free at current valuations.

Conclusion: A Transformed Story at a Transition Price

Darling Ingredients has completed a strategic transformation that the market has yet to recognize. The company is no longer a volatile biofuel play masquerading as an ingredients business; it has become a stable, high-margin circular economy platform with a free option on renewable fuel policy recovery. Q3 2025 marked the inflection point where core ingredients strength overwhelmed fuel segment weakness, prompting management to reframe guidance and focus investor attention on what matters: the $875-900 million EBITDA engine that is growing and gaining market share.

The investment thesis hinges on two variables: the durability of core ingredients margin expansion and the timing of policy clarity for DGD. The former looks sustainable, driven by integrated operations, proprietary technology, and favorable supply chain dynamics. The latter is uncertain but asymmetric—policy delays have already been priced into the stock, while any resolution could unlock substantial value from 1.2 billion gallons of capacity.

Trading near five-year lows on sales and book value multiples while generating its strongest operational performance in 1.5 years, Darling offers a compelling risk/reward profile. The market sees a challenged biofuel company; investors should see a dominant ingredients platform with a free call option on policy recovery. As management executes its deleveraging plan and the Nextida joint venture accelerates growth in high-margin collagen markets, the gap between perception and reality should narrow, delivering attractive returns to patient shareholders.