By Nathan Slaughter
As a self-confirmed needle-phobe, I try not to glance at those opaque bins in the doctor's office that are full of used syringes and other such instruments. But looking in the other direction doesn't change the fact that healthcare facilities go through a mountain of "sharps" every single day.
The image isn't terribly appealing, but the rational investor in me knows that there is an opportunity lurking here.
The healthcare business is immune to an ill economy; people need vaccinations, sutures and blood screens regardless of business cycles. Medical waste disposal isn't quite as simple as hauling away household garbage or yard clippings -- this business falls under the watchful eyes of the Environmental Protection Agency (EPA), the Department of Labor, Occupational Safety & Health Administration (OSHA) and several other regulatory bodies.
In short, that means two things: Demand is constant and barriers to entry are high.
Stericycle (NASDAQ:SRCL) is the dominant player in this field. The firm safely empties all those bins, and also removes discarded waste from research facilities, laboratories, hospitals, surgical centers, pharmacies, veterinary clinics and even dentists' offices. Add them up, and the company has won the business of more than 430,000 customers around the world.
We're not just talking needles either. As fate would have it, my wife happens to work for a major regional blood bank, and she informs me that Stericycle comes like clockwork to pick up used test tubes and all types of contaminated materials.
Logistically, it takes a large footprint to generate a fair return in this business -- servicing remote facilities far off established routes just isn't profitable. Stericycle's network is second to none, which is why the firm's operating margins of 27% are three times the industry average.
Stericycle's safety record and environmentally-friendly waste treatment system speak for themselves. So customers don't hesitate to sign up for 3-5 year contracts that renew automatically -- which keeps retention rates consistently above 95% -- because any mishaps can be met with stern fees and even loss of license.
With the firm adding new customers and keeping old ones, revenue has soared from $67 million to $1.1 billion during the past decade. Meanwhile, profits have doubled every 2.2 years on average and jumped +28% last year despite the recession. Remarkably, the firm has either met or exceeded earnings expectations every single quarter since its IPO in 1996.
But this growth story is still unfolding.
Ten years ago, large accounts represented two-thirds of Stericycle's sales, and small customers just one-third. Those percentages have now flip-flopped. It's nothing but a good thing for the company as smaller clients have growth potential of their own, which means more waste going forward. They also have less power at the bargaining table, so prices for Stericycle's services tend to be higher.
And there are still plenty of potential customers that haven't yet been reached. It may be the industry's biggest player, but Stericycle only controls 11% of this fragmented $10 billion market.
There will always be biohazardous materials that need to be safely collected and disposed of, and heavy regulatory oversight discourages new competitors from joining this race. Even if they did, any future rivals will be hard-pressed to duplicate Stericycle's vast network, low prices, and patent-protected waste treatment process.
Disclosure: No positions