A Few Reasons To Buy Stericycle

| About: Stericycle, Inc. (SRCL)

Proper disposal of waste is important for mankind, and also necessary to keep the environment clean. Medical waste is the third largest source of waste in the United States, with hospitals dumping more than 2 million tons of waste annually. Stericycle (NASDAQ:SRCL), the market leader in the medical waste management, has a great financial record with higher customer satisfaction.

Stericycle has a 95% customer retention rate that demonstrates the success of its effort. It provides a safe, cost effective and environmentally friendly method to dispose of medical waste, as a result customers do not hesitate to sign 3-5 year contract with the company. Stericycle only controls 14% of the global medical waste disposal market, that means still plenty of customers have not yet been reached.

Stericycle has achieved double-digit growth in its sale and profit in each year. The company also displayed strong gross profit and net profit margin staying within a reasonably consistent range of 43%-47% and 12%-15%, respectively. The main reason for the company's strong growth is the low competition. Stericycle's extensive network makes it hard to compete with. Stericycle's industry peers like Republic Services (NYSE:RSG) and Waste Management (NYSE:WM) are strong players in the waste management industry, but medical waste is a smaller part of both Republic Services and Waste Management. There are significant barriers that prevent competitors from copying Stericycle's business model. These barriers include: substantial infrastructure investment, strong customer base, and extensive government licensing and regulatory requirements.

Regardless of what the economy is doing, there is medical waste in the U.S. and abroad. Stericycle operates in an industry that is extremely regulated by federal and state governments. Regulatory bodies in the U.S. imposed strict health care regulations that must be followed. These strict regulations have forced health care service providers to outsource waste treatment function to companies like Stericycle. The company will continue its growth in the waste disposal industry because health care regulations are continuously increasing over the time, making in-source medical waste disposal process expensive especially for small medical practices.

Demand for health care services is increasing due to the increasing number of elderly in the U.S. As people age, they require more medical care, leading to an increase in the quantity of medical waste. The U.S. aging population is expected to increase in the coming years that determines the more growth opportunities for Stericycle.

In the U.S. the proportion of the population that is over the age of 65 is expected to increase from 12.4% in 2000 to 19% in 2030. The proportion of the population aged>85 years, which is the group most likely to need health and long-term care services, will increase from 1.5% in 2000 to 2.6% in 2030. The total medical waste management market revenue is estimated to reach $10.3 billion from 2013 to 2018. By 2018, the U.S. medical waste management market revenue is forecasted to reach $4,040 million from 3,100 million in 2013.

Stericycle has two types of customers: large quantity generators (LQGs) and small quantity generators (SQGs). The company is focusing on small quantity generator customers and offering new services to increase the small customer segment. Small customers have less bargaining power, as a result these customers deliver high margins for the company. Expansion of the small customer segment will help the company to expand its top and bottom lines in the future.

Bottom line

Stericycle is financially strong with reasonable revenue and earnings growth. The company has an extensive network in medical waste disposal business due to which it is hard to compete with. It has great growth opportunities. In my opinion, Stericycle will expand its market share, increase earnings and outperform in the stock market in the next few years. Therefore, I give a 'buy' rating to Stericycle.

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.