We initiated coverage on drug contract research company Icon PLC (ICLR) in May 2016; in 17 months, t...
Stericycle: Expanding Beyond Medical Waste
03/23/2016 8:00 am EST
Our latest featured recommendation is an industry leader in medical waste disposal that has driven impressive long-term earnings growth by deploying the company’s ample free cash flow into more than 400 acquisitions since 1993, explains Peter Staas in Capitalist Times.
The acquisitions made by Stericycle (SRCL), at first glance, may appear somewhat scattershot until you consider that most of these platforms developed by identifying customers’ needs for associated services.
For example, one of the first complementary businesses that Stericycle launched focused on developing a suite of safety and compliance services.
This helps its customers in the health care industry implement best practices for safely handling medical waste and meeting OSHA and other regulatory requirements.
Today, Stericycle has emerged as the global leader in handling product recalls, a complex process that involves notifying and communicating with consumers, processing product returns and resolving claims.
Stericycle’s communications solutions segment offers 20 distinct services to customers in the health care world, as well as real estate and property management, utilities, government services and funeral homes.
Last year’s $2.3 billion acquisition of Shred-It, an industry leader in the destruction of sensitive paper documents and hard drives, was due to customer requests for help with this aspect of the compliance process.
Stericycle’s focus on complementary acquisitions to drive earnings growth goes hand in hand with its effort to target small-account customers — for example, doctor’s and dentist’s offices.
Contracts with smaller customers usually entail higher gross margins, and these clients are more likely to outsource compliance-related functions.
Although Stericycle has an impressive track record of operational excellence and integrating acquisitions, the 2014 purchase of PSC Environmental and the push into hazardous waste has introduced a cyclical component to results.
Likewise, revenue from product recalls is lumpy and the purchase of Shred-It entails exposure to prices for recycled paper.
Concerns about the increasing cyclicality of Stericycle’s revenue mix strike us as overblown.
In our view, the company’s time-tested strategy of bolt-on acquisitions and growing stream of free cash flow should continue to generate solid returns for patient investors with a longer time horizon — especially those who establish positions at favorable prices.
Stericycle rates a buy on pullbacks to less than $110 per share, though prospective investors should consider easing into this position to take advantage of any weakness in the broader market.
By Peter Staas of Capitalist Times
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