Stericycle in Neutral Lane

We reiterate our Neutral recommendation on Stericycle Inc. (SRCL - Analyst Report), a leading provider of regulated medical waste management services as well as product recall and return services in the U.S. Stericycle’s fourth quarter and fiscal EPS as well as revenues grew year over year, handily beating the Zacks Consensus Estimates.

Historically, Stericycle has grown through acquisitions and internal growth and the fourth quarter was no exception. During the quarter, Stericycle completed an unprecedented 17 acquisitions. In 2010, Stericycle completed 33 acquisitions, the highest in the last decade. The company is continuously looking for strategic acquisitions to further strengthen its existing market position and expand its geographic base. Stericycle’s current merger and acquisition pipeline remains quite robust, representing approximately $100 million in additional revenue.  

Over and above the pipeline already discussed, in September 2010, Stericycle entered into a merger agreement for the acquisition of Healthcare Waste Solutions Inc. (“HWS”) for $245 million in cash. The latter provides a resource management assessment and consulting program for all waste streams to healthcare providers and is also engaged in the collection, transportation, treatment and disposal of different types of waste.

The merger, subject to regulatory clearance, is expected to close in the second quarter. On closing, the accretion is expected to be in the range of 1 cent to 2 cents per share in the first year and approximately 4 cents to 5 cents in the second year. Stericycle’s current FY11 guidance does not include contributions from the acquisition. We thus believe that there could be further upward revisions to guidance once the deal closes.

In addition to growth being fueled by acquisitions, Stericycle also posted healthy internal growth in both domestic and international operations in the reported quarter. Bio Systems remains the key product offering for large account customers, while small account growth is primarily driven by the company’s Steri-Safe product offering. An increased rollout of these services could accelerate its EPS growth.

At the end of fiscal 2010, Stericycle had approximately 485,400 accounts, of which over 472,000 were small and the balance were large customers. The company offers multiple service offerings to its customers, which add to the value of each account. Currently, less than 20% of the large quantity customers and approximately one-third of its small quantity customers use its multiple services, leaving the company a long runway for growth.

To analyze the company’s possible pitfalls, its growth through acquisition strategy has inherent risks. With the company being significantly larger than before, new acquisitions may not have as much an impact on the company’s growth. Further, given the increasing competition in the industry, the company may not find suitable businesses to buy at the right prices. Further, the recent spate of acquisition activity is leading to higher overhead and integration-related expenses, which could have an adverse impact on operating margins.

We thus maintain our Neutral recommendation backed by a short term Zacks #3 Rank (Hold).

Lake Forest, Illinois-based Stericycle’s customers fall into two categories – small-accounts (outpatient clinics, medical and dental offices, long-term and sub-acute care facilities, and retail pharmacies) and large-accounts (hospitals, blood banks and pharmaceutical manufacturers). The company caters to a wide clientele spanning domestic and international markets. Stericycle competes with US Ecology Inc. (ECOL - Snapshot Report) and Waste Management Inc. (WM - Analyst Report).

Read the full analyst report on WM

Read the full analyst report on SRCL

Read the full analyst report on ECOL