A Close Look At Sharps Compliance

| About: SHARPS COMPLIANCE (SMED)

Summary

It is focused on growing its recurring revenue.

For a long time, it was providing cost effective mail-back service and now has started offering pickup service also.

A well-managed company with a strong balance sheet.

After a record breaking snow last winter, most of us enjoyed this year's unusually mild winter and flu season. While most of us are thanking El Niño for that, Sharps Compliance Corp (NASDAQ:SMED) isn't, but rather hoping for a late flu season. It is not an evil corporation that enjoys people suffering; rather it is in the business of medical waste management. When more people get vaccinated, the company recycles more syringes and generates more revenue.

Overview

Sharps Compliance is a small medical waste management company. It collects, transports and recycles unused medications, used needles and other medical waste. It also provides services to properly dispose of hazardous waste and universal waste like batteries, items containing mercury, etc. The company provides both mail back and route-based pickup services to collect and transport medical waste. It provides these services to many sectors such as retail pharmacies, pharmaceuticals, doctor offices, veterinaries, home healthcare, residential and government.

It started as a cost effective mail back service provider for disposing of medical waste. In recent years, it is diversifying its offerings and providing both mail back and route-based pickup services. It uses UPS (NYSE:UPS) to transport its mail back service, so in the past, it was able to scale easily. However, now that won't be the case.

In 2012, it formed a joint marketing alliance with Daniels Sharpsmart Inc., a world-leader in sharps containment and medical waste management. Daniel provides pickup services for large quantities while Sharps Compliance provided mail back services for small quantities. They have complementary services, so they blended their offerings.

In 2015, it introduced route-based pickup service in Texas. Through acquisitions, it is also strengthening that capability in the Northeast market.

It owns one of the top recycling facilities in the country, in Texas, to treat medical waste. To strengthen its Northeast market operation, it is planning to open a new recycling facility.

Going after Recurring Revenue

In 2009, it signed a five-year contract with a US Government agency for 40M to provide rapid deployment to collect, transport and recycle medical waste in case of emergency. So it expanded its operations to serve that contract. However, in 2012, the contract was cancelled and the company was forced to scale back its operations and focus on generating recurring revenue. It decided to expand its presence in the professional market that is dentists, veterinarians, clinics, private practice physicians, etc. The professional market is extremely fragmented, so it strengthened its sales force. In recent years, it has consistently grown that segment.

Not an everyday consumer product

When someone wants to dispose of unused medication, they can walk to a CVS Health (NYSE:CVS) and buy a Sharps Compliance mail back offering Takeaway medication recovery system. But it is not an everyday consumer product and many towns offer free disposal of unused medication. So at any time, pharmacies carry only a few items.

Industry

Medical waste management is a very fragmented industry and Stericycle Inc. (NASDAQ:SRCL) is the industry leader. The threat of a new entrant is very low. The Affordable Care Act, government regulations, growing aging population are just a few factors that will influence industry growth.

Takeaway

It is a well-managed company and has a strong balance sheet. Management is being very prudent and is focusing on sustainable, profitable growth. It is focused on growing recurring revenue and recently, it also has signed a government contract.

2008 2009 2010 2011 2012 2013 2014 2015
Revenue (in thousands) 12,841 20,297 39,156 19,395 21,787 21,530 26,570 30,902
EPS 0.01 0.30 0.63 (0.20) (0.24) (0.18) 0.06 0.07
Revenue Growth 7% 58% 93% (50%) 12% (1%) 23% 16%
Profit Margin 1% 21% 24% (15%) (17%) (13%) 4% 4%
FCF % sale (1%) 12% 16% (3%) (4%) (9%) (4%) 5%
Click to enlarge

In 2015, the company's stock rose significantly and this year it has shredded most of that gain. Strong flu season, recurring revenue growth, profitable without a large contract, the Ebola scare are few reasons for that stock price explosion. During that time, many of its insiders have sold stock. Even at the current price, the company is not that undervalued. No one can predict the weather or severity of a flu season. However, it is a well-managed company and it's growing its recurring revenue. So maybe it is worth it to keep it under your radar.

Disclosure: I am/we are long SMED.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.