Stericycle Inc. (SRCL, Financial) is the largest provider of regulated medical waste management and related services to hospitals and other medical and dental offices in the United States. It also owns Shred-it, the world’s largest document destruction company, but the majority of its business is handled through the disposal of medical waste through a massive network of speciality processing facilities.
A company like Stericycle is crucial to our society. Just think of all the needles, syringes, gloves, cultures, bloodied materials or other bodily waste that is generated in hospitals every single day.Â
Over the last decade, the company has produced excellent top-line growth and used profits to build its book value from $7.84 to $33.65, while driving sales from $1 billion in 2008 to over $3.5 billion in the last 12 months. This performance, however, has not translated into long-term value creation for shareholders. The stock is at the same price it was in 2008, and down 60% from its high just a few years ago.
A big factor contributing to this performance was the $2.5 billion Shred-it takeover weighed on the company, with integration being more complex and arduous than expected. With that said, Stericycle still sits at the top of the industry leaderboard and is not losing market share to smaller regional companiess. Retention rates are still north of 90% and, with increasing regulatory oversight, the chances of a smaller competitor doing any real disruption are low. Plus, it has a lot of cross-selling opportunities that were not available before the Shred-it buyout. Only time will tell if those inroads become symbiotic or not.
More importantly, Stericycle is looking for earnings per share to come in around $4.50 this year and $4.70 next year, continuing to push the company’s book value higher as it navigates a pricing-reset period among small-quantity med-waste accounts. Health care practices continue to consolidate and gain bargaining power as they deal with their own budget constraints. Medical costs are going to be a topic for debate for years, even decades, to come, and that will likely put pressure on Stericycle’s ability to raise prices to meet industry inflationary demands.
Stericycle is priced far below historical averages across the board. It will still likely grow at high single digits into 2023. And, at some point, the market could (or should) re-evaluate the shares to 20 to 30 times earnings, three to four times book or three times sales. In any of these scenarios, the company is worth twice as much as it is today.
Disclosure: I have no positions in SRCL.
