Keep a Clean Conscience Investing in This Dirty Business

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According to recent research from the United States Department of Agriculture, the average American eats nearly 2,000 pounds of food every year, including around 415 pounds of vegetables, 185 pounds of meat, and 85 pounds of fats and oils.

While those numbers may serve as a surprising, entertaining illustration for just how much we consume, here's a more ominous question: what happens to all the stuff we don't eat?  

As a consequence of our gluttonous ways, businesses in the U.S. currently generate approximately 3 billion gallons of waste cooking oil and more than 70 billion pounds of meat and vegetable bi-products annually.  What are we to do, then, with this overwhelming tsunami of slimy, inedible waste?

The Stock

Foolish investors, meet Darling International (NYSE: DAR), America's leading provider of rendering, recycling, and recovery solutions to the nation's food industry.  Since 1882, Darling has capitalized on its willingness and ability to gather and reuse our country's food waste.  Once the material is collected, Darling turns it into a variety of forms with commercial uses for products, including animal feed, soap, tires, lubricants, biodiesel, and organic fertilizer.

Before we dig deeper, let's have a look at some of Darling's key metrics:

<table> <tbody> <tr> <td> </td> <td><strong>Darling International, Inc.</strong></td> </tr> <tr> <td><strong> Market Capitalization </strong></td> <td>$2.0 billion</td> </tr> <tr> <td><strong> Debt-to-Equity Ratio </strong></td> <td> <p> 0.24</p> </td> </tr> <tr> <td><strong> Current Ratio</strong></td> <td> 2.00</td> </tr> <tr> <td><strong> Current P/E Ratio</strong></td> <td> 15.3</td> </tr> <tr> <td><strong> Estimated Forward P/E Ratio</strong></td> <td> 12.4</td> </tr> <tr> <td><strong> Dividend Yield</strong></td> <td> N/A</td> </tr> <tr> <td><strong> 5-Year Annual Revenue Growth</strong></td> <td> 21.89%</td> </tr> <tr> <td><strong> Gross Margin</strong></td> <td> 27.8%</td> </tr> <tr> <td> <strong>Net Margin</strong></td> <td> 7.7%</td> </tr> <tr> <td><strong> Return on Invested Capital</strong></td> <td> 10.2%</td> </tr> </tbody> </table>

Darling sports a solid balance sheet with $87 million in cash, a low long-term debt-to-equity ratio of 0.24, and a respectable current ratio of 2.00, which shows it has plenty of resources to pay its near-term financial obligations.  In addition, shares of DAR currently trade slightly below the S&P 500's current median P/E ratio at 15.3 and sell at a conservative 12.4 times next year's estimates.  While DAR currently doesn't pay a dividend, its ROIC of 10.2% shows it has no trouble finding ways to create value for shareholders by investing capital in its business.  Finally, and perhaps most surprisingly, this 130 year old company has managed to grow its revenue by nearly 22% annually for the past five years. 

The Next Big Thing

Putting Darling's current primary business functions aside, the company boasts another potentially-huge growth catalyst in its 50/50 joint venture of Diamond Green Diesel (DGD) with oil-refining giant Valero Energy (NYSE: VLO).  Originally announced in the fall of 2010, the deal aims to build a refinery capable of converting a stunning 1.1 billion pounds of fat into nearly 137 million gallons of renewable green diesel each year.  

In addition to keeping a massive amount of waste out of our landfills, biodiesel is less toxic than table salt, biodegrades as fast as sugar, and creates substantially less air pollution than conventional petroleum diesel.

That said, Darling and Valero aren't just doing this out of the goodness of their hearts; if the DGD plant were running at planned capacity last quarter, it would have contributed between $9.4 million and $11.8 million in quarterly net profits for both companies.  This seems a paltry sum for the behemoth Valero, representing an increase between $0.017 and $0.021 per share, or less than 2% of VLO's total third quarter net profit.  For Darling, however, this would have meant an EPS increase between $0.08 and $0.10, or a 26% to 31% gain from its most recent quarter's earnings.  In addition to the substantial earnings boost, the premium diesel will afford Darling new margin management opportunities to help offset the negative effects of inflation and rising food prices on existing product margins.

Even so, while the innovative DGD project is the largest of its kind, it also places Darling squarely in the competitive crosshairs of more established players in the biodiesel industry like Bunge Limited (NYSE: BG) and Renewable Energy Group (NASDAQ: REGI).  While Bunge's biofuels segment doesn't operate its own green diesel plants, its status as a significant supplier of vegetable oil supplies to other biodiesel producers could be threatened by the all-inclusive operation offered by Darling and Valero.

Shareholders of REGI, however, should be even more concerned.  At the time of its IPO earlier this year, Renewable Energy Group proudly proclaimed its position as the largest biodiesel producer in the United States as it operated six biodiesel plants with an aggregate production capacity of 212 million gallons per year.  This sounds much less impressive, though, when we remember Darling's first DGD plant will be capable of producing nearly two-thirds the total capacity of all six of REGI's plants combined.  Furthermore, should the DGD joint venture prove successful, you can bet Darling and Valero will be eager to pursue further expansion.

What Now?

Despite its position as the leading rendering company in the U.S., Darling is still relatively small with a $2.0 billion market capitalization.  With an approximate 10% to 15% market share in rendering and between 30% to 35% for the bakery waste industry (thanks largely in part to its Griffin acquisition), Darling has plenty of room for growth through both organic and acquisitive means.

While hurricane Issac pushed Darling's green diesel plans back by a few weeks, CEO Randal Stuewe stated during the company's Q3 earnings conference call the plant is currently in its "final stages of construction and should begin commissioning in phases starting early next month [...] with very little risk to (their) budget."  Investors have certainly taken notice, driving shares of DAR up 20% over the last six months.  Even so, the stock is by no means expensive and this growing, steadily-profitable company should continue to quietly reward its investors for the foreseeable future.

symie5 has no positions in the stocks mentioned above. The Motley Fool owns shares of Darling International. Motley Fool newsletter services recommend Darling International. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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