Stericycle Stock Hasn't Been This Attractive In Many Years

| About: Stericycle, Inc. (SRCL)


Stericycle is a money-making machine that has created life-changing wealth for its shareholders.

The company has a rock solid competitive position and operates in a market with huge secular tailwinds.

The company is experiencing a temporary slowdown and currently offers long-term investors one of the most attractive entry points in many years.

Stericycle (NASDAQ:SRCL) is a relatively under-followed company active in the medical waste business.

The stock has been a money-making machine for investors since the company listed in 1996. An investment of $10 000 at the time would have turned into a life-changing half a million dollars currently.

Although the company has grown a lot since its beginning, it still only sports a market capitalization under $10 billion and has a huge runway for growth.

The company is very attractive for two basic reasons: (i) it operates in a secular growing market and (ii) it enjoys large competitive advantages that create very favorable odds that the company will benefit handsomely from the business trends.

Stericycle's core activity is in the medical waste business, although it has been expanding to neighboring markets in order to create portfolio effects, entrench itself with clients and benefit from cost synergies. Stericycle last year acquired Shred-it, a company that provides information destruction services, which will reinforce its compliance solutions business.

This isn't the first acquisition that the company has made. Since 1993, Stericycle has bought a significant number of companies which has allowed it to grow in ways not imaginable through organic growth and increase its revenues manifold.

The healthcare sector has become increasingly regulated which has led the industry to progressively outsource medical waste processing. Simultaneously, an aging population and greater demand for healthcare services has determined the consistent development of outpatient facilities to the detriment of hospital operations which increases the number of points operators in the medical waste business need to serve. Compliance has also become an ever more regulated and financially burdensome matter which favors the development of outsourced medical waste businesses.

With its unmatched scale in medical waste disposal, Stericycle has developed a rock solid competitive position. The company operates a dense network of collection routes and operating facilities in the US which will be extremely difficult for competitors to replicate with the same degree of operational and financial efficiency.

The market is furthermore very concentrated which makes it a sellers' market. As costly permit requirements render entry of new competitors difficult, health care entities are left with very few providers to choose from and little bargaining power. This also translates into high switching costs as the limited offer available and the financial and reputational risks associated with medical waste mishandling strongly discourage provider switching without a compelling reason. Stericycle can thus be appropriately considered as a defensive businesses with a reliable stream of recurring revenue which should thrive under a variety of economic conditions.

Although Stericycle already enjoys significant scale in the US, its room for international expansion is huge. The company already has a significant presence in South America and Europe, but has very few operations in Africa and Asia yet, namely in South Africa, Singapore, South Korea and Japan. As demand for better managed medical waste disposal increases in these emerging regions in the years and decades ahead, Stericycle is bound to benefit immensely. It is not unrealistic to think that the company may grow earnings outside of the US in the high teens over the next few years.

Last but not least, a business with these characteristics and a huge potential for growth hardly ever comes cheap. Stericycle has historically traded at a significant P/E premium to the market and held on strongly in the depths of the Great Recession while the overall market was collapsing.

Last quarter, the company released uncharacteristically weak results and investors trashed the stock, sending it down nearly 30% when the market opened the next day. Investors were shocked by a significant slowdown in revenue growth - mainly due to the strength of the dollar - that management had previously not hinted at.

The company is releasing fourth quarter earnings on February 4 and it will be interesting to see how long it may take for it to return to its former growth levels. In the meantime, the stock is more than 20% off its highs, making the current price one of the best entry points long-term investors have been given in years. The slowdown that the company has experienced recently is clearly in the category of "solvable problems" and it is a matter of time until the huge opportunities for growth and the company's strong competitive position reassert themselves again.

I am following this little gem closely and unless the earnings release next week reveals problems which are more serious than anticipated, I am seriously considering taking a position in the stock. Stericycle has all the characteristics of a stock that can appreciate another 10, 20 or 30 times over the course of the next few decades. If you are looking for high growth from a defensive business, Stericycle may well be for you.

Disclosure: I/we 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.