Capacity expansion will result in incremental EPS
The DGD project can support a 15% expansion in capacity without requiring additional invested capital; capacity expansion beyond 15% would require additional capital expenditure. The project, which began production in late June, will stay in the start-up phase for the next six months. Expansion will begin after the completion of the start-up phase in December 2013. The expansion beyond 15% will cost around $50 million-$100 million, and the joint venture earnings will fund it.
The DGD project is expected to contribute $45 million and $80 million in earnings for equity shareholders in 2013 and 2014, respectively. The earnings for 2014 have been calculated considering that the project will be running at 115% capacity. The estimated EPS for 2013 is $1.22, of which the DGD project is expected to contribute almost one-fifth at $0.20-$0.25. After capacity expansion in 2014, the project is likely to contribute almost 33% of the expected $1.35 EPS generation.
Free cash flow generation
Darling International Inc. (NYSE:DAR) had $121.8 million in cash on the balance sheet at the end of the first quarter of 2013. The free cash flow is expected to swell to $110 million-$115 million annually in the long term. The current cash and the expected free cash flow are prompting the company’s management to consider a dividend payout and share buyback program. A three-year share buyback program worth $250 million can be initiated without requiring additional leverage, considering the amount of cash and expected income from the DGD project. Considering a 10% year-over-year increase in earnings in the next three years, the EPS is expected to rise to $1.67 from the $1.11 figure in 2012 if the company initiates the share buyback program.
Conclusion
Despite being a leading player in the U.S. in the rendering market, Darling is a relatively small organization with approximately $2.45 billion market capitalization at the end of the first quarter of 2013. This suggests that the company has plenty of scope to grow organically, and inorganically through joint ventures and acquisitions. Darling has enough cash on its balance sheet to target small companies in the rendering segment to improve its profitability.
The DGD project provides a huge opportunity to the company in terms of venturing into the renewable fuel market and gaining significant market share. The company will expand DGD’s production capacity to 115% in 2014, and thus pose a significant threat to REG in biodiesel production capacity.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Darling International. The Motley Fool owns shares of Darling International.
The article A Dirty Business You Can Bet Your Clean Money On originally appeared on Fool.com and is written by Shweta Dubey.
Shweta is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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