Stericycle Inc. (SRCL) has been providing regulated medical waste management and product recall and return services in the U.S. since 1989. Operating an extensive national network that caters to both large quantity generators (such as hospitals and pharmaceutical companies) and small quantity generators (such as medical schools, outpatient clinics, and other healthcare providers) Stericycle is the largest domestic provider of regulated medical waste management. The firm works the international market as well, providing services to Latin American countries, European and Japanese, with a network of 89 processing or combined processing and collection sites, and an additional 97 transfer, collection, or combined transfer and collection sites.
Stericycle manages medical waste, which includes items such as gloves, syringes, and needles, waste that needs to be handled properly, according to legal regulations. The firm also provides training on medical-waste handling and manages patient communications. New regulations always open growth opportunities for Stericycle, profiting from the increase of medical waste.
The company’s results for the fourth quarter 2013 showed an increase in both earnings and revenues year over year. New acquisitions and expansions of its service portfolio have strengthened the company worldwide. However the recent investments have increased the company’s expenditures and costs, spending which might affect operating margins in the future.
A Model, an Industry
This industry is highly regulated because of the hazardous materials it deals with, and the risks it involves. These circumstances deter entrants, placing Stericycle in a leading position among the industry, as customers tend to prefer relying on an established company rather than trying out a new cheaper one. Macroeconomic fluctuations and economy deteriorations barely affect a company such as Stericycle, precisely because of the nature of the medical waste management industry. Therefore, we shouldn’t be surprised when regarding the company’s outstanding financial track record, which has been delivering increased revenue and EPS every year since 1998. In addition to its leadership among the industry, the company operates with multi-year-long-term contracts, which allow price increases and thus enables the company to adjust to the market fluxes.
For some time now, the company has been focusing in smaller customers, a shift that has represented an increase of its gross margin and strengthened its bargaining power. Since 2000, Stericycle's revenue has averaged annual growth of 14% and earnings 14%. The company’s competitive advantages increase profitability and allow development of an acquisition strategy. Moreover, the international revenue has grown on average 25% year over year, for the past five years. Nevertheless, this market is still more uncertain than the domestic one, as its density is still rather low.
The strong necessity of medical waste services support a reliable stream of revenue for the firm, protecting Stericycle from the risks of cyclicality in this business. Nevertheless, despite having a strong position among the market, high competition has forced Stericycle in the past to reduce prices for the larger customers. This uncertainty remains a company’s weak point.
The recent acquisition of the patient communications system Nitify MD although distant from the company’s route based medical waste management platforms, is still to prove its effect on overall growth. The acquisition model, even if a solid growth strategy implies additional costs of integration and other expenses which might weight on margins. Moreover, new regulations can always be adopted, and these modifications impose compliance requirements on Stericycle, which might eventually modify the company’s methods and therefore increase costs.
Despite having to deal with elements such as competitive pressures or heavy regulations, the company has sustained a strong position among this market. Its historical performance has built robust brand image, and customers rely on the company’s efficiency. Stericycle has proven as well to handle with great efficiency new acquisitions, and sustain considerable shareholder returns as excess capital is returned to shareholders via stock buybacks.
Even though the company’s focus on the international market has slightly reduced ROICs, Stericycle has nevertheless increased this figure since 2008. It is true the international expansion derives some uncertainty regarding the density of customers and the network recollection routs. Still, the company has ample opportunity to expand its services overseas, and the health-care disposal services demand continue to increase. Analysts suggest that this company’s strong financial history has placed it in a good position among peers; however, the chances of continuing expansion with growth along with the additional costs derived from acquisitions are suggesting we better wait and see the results for the next quarters.
Disclosure: Damian Illia holds no position in any stocks mentioned.