Legendary fund manager Peter Lynch went out of his way to find companies that did yucky things because they were often great businesses. My approach takes that concept one step further: I’ve found one stock that provides an underlying service for a whole sector, a service the sector simply can not do without, yet the business is so gross, so undesirable, that it’s shares are sharply undervalued by Wall Street.

Have you ever wondered what happens to the parts of a chicken that don’t get eaten? Or the grease a restaurant throws out after it’s used? After all, someone also has to remove used cooking oil and pump grease traps. Turns out there are companies that provide recycling and rendering services through which animal and food waste products are turned into useful commercial goods, including tallow, protein meals (meat and bone meal) and yellow grease.

The largest company of this kind is Darling International (NYSE: DAR). Darling collects the grease from restaurants and along with the byproducts from meat packing plants, butcher shops, grocery stores and independent meat and poultry processors. From these raw materials, Darling creates two products: meat and bone meal, and tallow. These items are converted into a lot of useful everyday products, including feed, soap, candles and even explosives. These products are then sold globally.

Who would’ve thought a company like this would even exist? Yet it does, and has since the late 1880s.

I don’t like to throw a lot of numbers around, but it’s important for investors to look at the table below because it summarizes why I think Darling is a compelling value that is being totally overlooked by the market.

I happen to be very big on the PEG ratio as a guide. When I see a PEG near 0.50, it suggests that the stock’s fair value is about +100% higher than where it currently trades. Another ratio I look at as a guide is the EV/EBITDA ratio. (This assigns a multiple to stocks and allows investors to gauge a company’s value as a takeover target.) Anything under 7.0 for a stock in this sector has historically been undervalued, when one looks at buyout offers made during the past 20 years.

#-ad_banner-#Sure enough, the stock’s all-time high was $17.19, more than double its recent price.

This is where investors should ask about three other important issues.

First, does Darling have a sustainable competitive advantage? Yes. Anyone else looking to get into this business must have expertise in chemistry, agriculture and in meeting complex government regulations.

Second, what about management? It improved a negative cash flow situation during the mad cow scare of the early 2000s and is now generating more than $50 million a year in cash. Its paid down a lot of debt over the years and also recognizes that new regulations may create an opportunity to offer services nobody else has. Management has also posted an outstanding return on equity and has hedged the company well against both rising fuel costs and decreasing commodity prices.

Third, is the company so undervalued that a takeover could happen? This isn’t a requirement for me to buy the stock, but if the answer is affirmative, it provides extra incentive.

[See: How Investors Should Handle the M&A Frenzy]

The very low EV/EBITDA is the ratio to watch, and as I said, it is under the target for a takeover. There are chicken companies out there, such as Pilgrim’s Pride (NYSE: PPC), that would benefit from having its own rendering business. Pilgrim’s has $180 million of net cash on its books, which isn’t nearly enough to take out Darling, but a private-equity fund that wants to play along would make that acquisition feasible.

Action to Take –> Buy Darling. It’s the largest company of its kind. Everyone eats meat and chicken. The company is an experienced player in a sector with high barriers to entry, on solid financial footing and is extremely undervalued. I see an easy upside of +100% from here and possibly a buyout within five years.