Stericycle: A Diamond In The Waste

| About: Stericycle, Inc. (SRCL)

Increase in aging populations drives the demand for healthcare services, and an increase in healthcare services causes more waste generation. Healthcare service providers have to dispose of hazardous waste according to prevailing stringent regulations. This leads to an increase in cost for healthcare service providers, which are already facing pressure to reduce healthcare costs from the affordable care act. Healthcare service providers are left with no other option than outsourcing their medical waste disposal services, creating opportunities for regulated medical waste management companies. In the U.S., the medical waste treatment market is expected to reach $3.2 billion by 2015.

Stericycle (SRCL) is a leader in medical waste management and services with 14% market share in the $15 billion global market. It has grown at CAGR of 15.44% during 2007-2012. With infrastructure and global presence in regulated waste management services, Stericycle has potential to grow with same pace in coming year. Let's see how it plans to achieve this growth.

Recurring and predictable revenue streams

Stericycle's revenue comes from two types of customers, large-quantity generators, or LQ, and small-quantity generators, or SQ. LQ are hospitals, blood banks, and pharmaceutical manufacturers, and SQ are outpatient clinics, medical and dental offices, long-term and sub-acute care facilities, veterinary offices, municipalities, and retail pharmacies. Stericycle has 550,000 customers worldwide, of which 532,000 are SQ.

The company is focusing on SQ customers since they provide higher gross margin than LQ. In the second quarter, 63% of its domestic revenue came from SQ, which was just 33% in the fourth quarter of 1996. Due to the change in revenue mix, gross margin improved from 21% in 1996 to 45.2% in the second quarter of 2013. To increase its SQ customer base, Stericycle started a new service offering called StrongPak. This hazardous waste management program provides customized solutions to retailers. StrongPack provides services such as separating hazardous waste, managing and monitoring hazardous waste compliance, and keeping records of the business's compliance, etc. About 750,000 un-tapped retail locations in the U.S. will require such services, or else face fines for non-compliance. These will create a $1 billion market opportunity for StrongPack.

Long-term contracts, typically varying from one to five years with automatic renewal, contribute 95% of the company's revenue. Since it has predictable and stable revenue streams, Stericycle is a preferred investment for long-term growth investors. Stericycle investors witnessed EPS growth during 2007-2012. Its EPS grew at a CAGR of 18.47%, faster than its revenue growth of 15.44% during the same period.

Growing through expansion

The company is focusing on geographical expansion through tuck-in acquisition, which is quite visible from its acquisition pattern in the past. Stericycle acquires small companies with the intention to merge them into an existing business division. Tuck-in acquisitions help it reduce the cost of expansion in new locations. It has made 323 acquisitions since 1993 including 12 acquisitions in the second quarter of 2013. Out of 12 acquisitions, four were in the U.S., three in the UK, two in Brazil, and one each in Japan, Romania, and Portugal. These acquired companies have combined annualized revenue of $38 million.

The impact of acquisitions is visible in the company's second-quarter results. Out of the $57.6 million revenue increase, approximately $34.1 million came from acquisitions in the past years. Second-quarter revenue grew to $526.50 million from $468.90 million a year ago. Although 12 acquisitions contributed only $1.6 million in revenue in the second quarter, we can expect half of the $38 million in revenue to be reflected in the second half of 2013. Its acquisitions contributed more than $100 million in annual revenue in 2012. The company has already achieved revenue of $1.048 billion in first half of this year.

If we assume that Stericycle will maintain its organic growth of 7.8% it reported in first half for the rest of year, we expect the 24 acquisitions from the first half will contribute approximately $29 million in additional revenue in the second half. With this, the company can meet its estimate of $2.12 billion in revenue for 2013.

Potential threat from other major Players

Two major players, Republic Services (RSG) and Waste Management (WM), have been striving for a larger market share in the U.S. waste collection and management industry. The majority of the revenue of these two companies comes from non-hazardous solid waste collection and recycling. However, they are also aggressively acquiring small companies and looking to diversify their business into other profitable segments and regulated waste management (hazardous waste) could be one of them. Waste Management already has a presence in regulated waste with its medical waste segment, and it provides services similar to Stericycle, like recycling sharps and needles, medical waste collection, and disposal. Although these services do not contribute significantly to Waste Management's revenue, it could create a potential threat to Stericycle in the future.

If we compare the financials of these three stocks, Stericycle's second quarter revenue growth of 12% year over year was significantly higher than Republic's 3% and Waste Management's 2%. High revenue growth translates into better margins for Stericycle. It focuses on high margin customers, which is quite evident from its operating margin of 26% as compared to the competitors' 15%.


Republic Services

Waste Management

Qtly Rev Growth (yoy)




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Source: Yahoo finance

Bottom line

Stericycle has been trading at a premium compared to Republic Services and Waste Management due to its operation in a niche industry segment. It trades at a PE multiple of 35.50, higher than Republic's 26.43 and Waste Management's 22.62. Its high valuations are well justified with its strong financial performance. Trailing-twelve-month, or ttm, P/E of 34.33 is less than the stock's forward P/E of 27.82, which signifies earnings growth potential of 23.44% at its current price.


Republic Services

Waste Management









Forward P/E




Source: Yahoo finance

The company's focus on high margin customers with recurring revenue and its new service offering will generate stable earnings, and tuck-in acquisitions will fuel revenue growth. This stock has performed well and has given a return of 20.64% in the first eight months of this year. Those investors who are looking for long-term growth and capital gains should buy this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article