Stericycle Delivers Underwhelming Fourth Quarter

Narrow-moat-rated Stericycle SRCL posted fourth-quarter results that were slightly below our expectations. Revenue of $670 million missed FactSet consensus by approximately 4% but EPS of $0.60 was in line. Management mostly reaffirmed its long-term outlook but made a downward revision to its 2025 free cash flow guidance (previously $400 million) to a range of $325 million-$375 million. Shares plummeted over 11% on Feb. 23 as a result. We lowered our fair value estimate by 3% to $59 per share due to the weaker cash flow outlook. Nonetheless, we believe Stericycle’s initiatives to drive operational efficiencies across the business are beginning to materialize and provide a pathway to further margin expansion.

Stericycle delivered total revenue of $2.7 billion for full-year 2022, a 2% increase (nearly 6% organic) over the prior year. The regulated waste and compliance services segment (about two thirds of total revenue) posted 1.4% organic growth, primarily driven by pricing tailwinds as medical waste volumes remain constrained due to fewer elective surgeries and hospital staffing shortages. Management cited an uptick in the number of sites being serviced but lower volume per site. The secure information destruction services, or SIDS, segment delivered organic top-line growth of over 16% in 2022, as contract renegotiations enabled robust pricing surcharges. While the SIDS segment showed promising growth in 2022, we maintain our long-term forecast of 0%-1% annual segment growth. Full-year adjusted EBITDA margin declined 130 basis points to 16% as the company grappled with inflationary pressures during the year, though we note a material sequential improvement in second-half margin due to contract pricing tailwinds. We believe Stericycle has taken prudent actions to drive operational efficiencies, such as its continued enterprise resource planning system integration in North America, and capture pricing gains through contract modifications.