Stericycle Earnings: Divestitures and Currency Headwinds Hide Solid Fundamentals

Narrow-moat Stericycle SRCL reported second-quarter results featuring a 1.5% year-over-year revenue decline and an operating loss of $24 million. The market reacted negatively to the results, and the stock traded down nearly 10% on July 27. We believe this reaction was unwarranted as underlying fundamentals remain solid. Excluding the effect of divestitures and foreign currency exchange, Stericycle achieved organic sales growth of 2.3% and adjusted EBITDA margin of 15.2%. Management also reaffirmed full-year guidance, which targets 3%-5% organic revenue growth and free cash flow of $175 million-$205 million. We maintain our $60 per share fair value estimate, and we believe Stericycle’s stock is undervalued.

During the quarter, Stericycle’s regulated waste and compliance services segment increased organic sales 4.7% as it benefited from pricing actions and solid North American volume. Organic sales growth within the secure information destruction segment declined 2.1% year over year as the business lapped a strong second quarter in 2022 and experienced reduced fuel surcharges. Stericycle accomplished several key objectives during the period: it sold noncore operations in four international markets with two additional divestitures expected to close in the third quarter, and Stericycle also reduced its debt leverage ratio to 2.7, below management’s target of 3.0, and the company’s lowest leverage ratio since 2015.

We remain constructive on the strategic actions taken by management, including the sale of noncore assets, the reduction of debt, and the continued implementation of the enterprise resource planning system. As the largest player in the North American medical waste industry, we believe these initiatives, in conjunction with Stericycle’s competitive advantages, will allow it to greatly improve profit margins, with midcycle operating margin returning to the high teens amid low- to mid-single-digit organic revenue growth.