Though there's very little not to like about Stericycle (NASDAQ:SRCL), one of the strongest and best-managed medical waste services firms, we have some growing concerns about the firm's lofty valuation, which is roughly 27x the highest estimate on the street for next year's earnings and just under 30x our 2012 earnings-per-share forecast.
In fact, based on our DCF valuation process (and applying an 8.4% weighted average cost of capital), we think the firm is worth in the mid-$70s, well below where it is trading at today and the average price target of other analysts on the street. And that assumes double-digit top-line expansion for each of the next five years, and earnings power of nearly $5 per share by 2015, pretty bullish expectations. In its recently-reported second quarter, internal growth was in the mid-to-high single digits, and the firm guided the street to $2.80 per share for this year (so we're building in robust expansion). We make our DCF valuation model template available here, if investors would like to take a deep dive into Stericycle's valuation as well (the template can be re-used to value any other operating firm).
In all, we think Stericycle has excellent fundamentals but think investors are getting a little ahead of themselves. We'd wait for a pullback before initiating a position in the firm's equity, preferably at a level below the mid-$70s. Should it reach that threshold, we'd add it to our Best Ideas List.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.