One Stock You Need to Have on Your Radar

By Markets Fool.com

The world's population is growing at a rate of around 1.14% per year. While that rate has been slowly declining since the 1960s, the world population continues to expand, just at a slower rate. And with more people comes higher demands on natural resources.

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So, what does this increased demand mean for your average investor? Profits, as long as you know where to look. The answer, fellow Fools, is at Darling Ingredients (NYSE: DAR).

What is Darling Ingredients?
Darling Ingredients is an Irvine, Texas-based company that collects animal byproducts and organic residual materials and uses them in the development, production, and sale of natural ingredients across the globe. The end products are used in everything from marshmallows to medication, fertilizers on golf courses to feed for livestock, bone china to biodegradable diesel fuels. Darling Ingredients' end products are used in such a diverse array of products, the opportunities feel endless.

Why are we interested in Darling Ingredients?
Growing demand:Darling Ingredients is the only global ingredients company gaining the majority of its revenue from animal-origin material. Additionally, only 35%-60% of an animal's live weightends up on our dinner tables, so the excess byproduct exists. As the dominant player in such a large market, facing competition from only smaller, more local companies, Darling Ingredients has the most to gain. The growth potential in this technologically based industry is enormous given the spectrum of products.

Premium products:Darling Ingredients developed a unique process to add nutritional content to products across varying industries, allowing for the products to be priced at a premium. The diversity of products, paired with their high quality, define a perfect niche competitive advantage for Darling Ingredients.

Undervalued in the marketplace:The company experienced a compound annual growth rate of 44% in total revenue over the past five years. Also to be considered, though, is the fact that the gross margin shrunk from 25.7% to 21.1%.The price to book value ratio is only 1.27 times, while the average of the S&P 500 is 2.75 times. Additionally, when compared to peers, Darling Ingredients has a total enterprise value to total revenue ratio of 1.2 -- double the peer group average. However, we must keep in mind that Darling Ingredients has no direct competitor given the diversity of its products.

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What is the downside?
Darling Ingredients has a sufficient amount of debt on the books; $2,200 million (including trade debt), to be precise.

Summary of Key Ratios to Consider

Total Enterprise Value / Total Revenue

1.2x

Total Debt / Equity

106.8%

Total Debt / Capital

51.6%

EBIT / Interest Expense

2.2x

Source: S&P Capital IQ

These ratios are a combination of a few key factors. The first and foremost is growing pains. Specifically, DAR acquired VIO Ingredients business in January 2014, and Rothsay in October 2013. Acquisition and integration costs related primarily to these acquisitions were estimated about $24.7million for the fiscal year 2014. Additionally, DAR retired 8.5% Senior Notes in February of 2014, costing $19.9 million.

While these are very large numbers to consider, the above actions demonstrate management's commitment to growth and to reducing debt ratios.

Animal food to zeppoles
Darling Ingredients is poised for success in the long run because demand is increasing, the product is of high value, and currently, the marketplace is underestimating the company's potential. While debt is something to be considered, this company's commitment to turning wasted materials to useful objects is rivaled only by Oscar the Grouch. As we all learned on Sesame Street, one man's trash is another man's treasure. Darling Ingredients is a buy in my book.

The article One Stock You Need to Have on Your Radar originally appeared on Fool.com.

TMFamalin has no position in any stocks mentioned. The Motley Fool recommends Darling Ingredients. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.