Stericycle: Profit Margins Poised To Expand As Turnaround Progresses; Stock Price 30% Below Our FVE

Since its founding in 1989, Stericycle SRCL had been very acquisitive, having acquired over 500 companies. On the surface, this acquisitive strategy led to a lengthy period of impressive growth and the firm built unmatched scale. However, acquisitions began to stray from Stericycle’s core competencies and poor integration efforts caused inefficiencies to build. After decades of strong growth and profitability, Stericycle’s financial performance began to deteriorate in 2017. However, with a refreshed management team, led by CEO Cindy Miller, Stericycle’s much-needed turnaround strategy has progressed well. It has: 1) divested almost 20 noncore, low-margin businesses; 2) achieved its goal of reducing the firm’s debt leverage ratio to below 3 (it was 2.7 at the end of the second quarter); 3) been reinvesting in its competitively advantaged medical waste collection and disposal business, with improvements to its autoclave and incinerator infrastructure (including a new incinerator in Nevada)—and perhaps more fleet-related investment in the future; 4) moved the enterprise resource planning system implementation toward completion; and 5) implemented much-needed oversight and standardization across the company, which has improved revenue quality and operational efficiencies.

Stericycle’s operational focus has shifted back to its core competencies, and we see multiple levers for improved profitability and free cash flow generation. Over the next five years, we forecast Stericycle will realize 4% organic revenue growth, adjusted EBITDA margin will expand to 23.5% (up from 16% in 2022), and free cash flow will exceed $400 million by 2027. By then, we think Stericycle will have the financial flexibility to pursue prudent acquisitions and perhaps repurchase shares.

With narrow-moat-rated Stericycle’s stock currently trading at nearly a 30% discount to our fair value estimate, we think it’s a compelling investment opportunity for long-term investors.