Stericycle Poised to Seize upon Trends
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stericycle Inc. (NASDAQ: SRCL), North America's largest regulated medical waste management company, has been able to leverage its competitive advantages such as a network of processing, collection, and transfer sites worldwide. Furthermore, its industry leading operational efficiency and value proposition centered around enhanced customer efficiency should help it to generate industry leading long term operating results.
Revenue and earnings have each grown by more than 16% annually since 2006 while gross margins have been steadily improving, going from 44.3% in 2006 to 47.8% in 2011 for an average 45.8% during that time. Operating cash flow and free cash flow have grown by 13.8% and 15.3%, respectively, since 2006. Trends like increased industry demand for outsourcing services to combat rising health care costs and greater regulatory burdens, and an aging U.S. population that is demanding more medical services should play in Stericycle’s favor, allowing the company to use its competitive advantages for disproportionate value creation.
Primary competitors include Waste Management Inc. (NYSE: WM), Republic Services Inc. (NYSE: RSG), and Shanks Group PLC. These companies are integrated solid waste service companies that have regulated medical waste units among their other offerings. Stericycle’s forward P/E ratio for 2012 was 26.5x at a recent price of around $86. The estimated EPS growth rate for 2012 is 14% so the price to earnings to growth (PEG) ratio is 1.9x. This multiple is close to my PEG limit of 2.0x, but is more attractive than Waste Management at 3.2x. Republic Services PEG multiples is not meaningful as EPS is projected to decline in 2012. For 2013, analysts estimate Stericycle’s EPS will grow by 12.6% and the 2013 PEG is 1.9x which is significantly more expensive than Waste Management and Republic Services which are both at 1.1x. The growth rates for Waste Management and Republic Services are expected to increase from their estimated 2012 rates while Stericycle’s rate is expected to moderate slightly (from 14% to 12.6%) which causes the expanding disparity in PEG multiples from 2012 to 2013. I believe a reasonable premium is worth paying for Stericycle’s stable growth rate, but at $86 per share and a 1.9x PEG multiple, the premium is too high at this time.
Stericycle will face executive transition risk with the naming of company veteran Charlie Alutto to the CEO spot beginning in January, 2013. I believe a smooth succession away from long term CEO Mark Miller will be achieved because Mr. Alutto has been with the company since 1997 and the competitive advantages that have led to great past results remain in place. Also, Mr. Alutto is a good fit for the company's strategy of international acquisitions because he was previously the managing director for Stericycle's European business.
Over the long term, Stericycle will be able to maintain its competitive position as the leader of the medical waste management industry because of ever increasing medical waste regulatory burdens. Demand for the outsourced solutions provided by Stericycle will continue from large hospital organizations that presently dispose of their waste using in-house resources. This dynamic should help Stericycle gain pricing power over its large customers thereby benefiting cash flow. However, demand from large hospital organizations will be adversely impacted by a second trend in the industry. The aging of the United States population will drive demand away from large hospital organizations toward small quantity health care providers such as acute care clinics. This trend will provide Stericycle with higher margins and cash flow from its small quantity customers, but at the cost of incremental lost revenue from larger customers. International expansion is one way that the company is managing the anticipated loss of a portion of demand from large domestic customers.
Stericycle has a history of outstanding operational execution and its future should provide more of the same. I anticipate a smooth transition to the new CEO in 2013 and the industry faces a difficult but potentially favorable transition that should let Stericycle leverage its sustainable competitive advantages to create shareholder value. Despite this bright outlook, the shares currently appear fully valued at less than 9% below the all time high of $94.29 and more than 18% above the 52 week low. Stericycle is a great company with significant recurring revenue and earnings that I will continue to track with an eye to spotting a favorable entry point in a significant market correction.
56Steve has no positions in the stocks mentioned above. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend Republic Services, Stericycle, and Waste Management. 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.If you have questions about this post or the Fool’s blog network, click here for information.