EUR 850.00 For Business Accounts Only

Morningstar | SRCL Updated Forecasts and Estimates from 28 Jun 2019

Stericycle is by far the largest domestic provider of regulated medical waste management and ancillary compliance services, and among the largest in its international geographies. In its flagship domestic med-waste operations, Stericycle built its unmatched processing capabilities and network density through hundreds of tuck-in acquisitions (mostly accretive) over the past decade. The firm has also embarked on a few large deals including the 2014 PSC Environmental acquisition (industrial hazardous waste) and the 2015 Shred-it acquisition, which added secure document shredding services.Stericycle had enjoyed a long history of high-single-digit organic growth and healthy profitability, but by late 2015 it saw the emergence of headwinds that have plagued operating performance and execution. PSC and Shred-it were large transactions that required costly integration efforts, while making the firm a more complex organization. Shred-it added ancillary services to the mix, but both deals initially weighed on margins and ROICs. Additionally, the firm is amid a painful pricing-reset period among small-quantity, or SQ, med-waste accounts. The consolidation of independent healthcare practices into larger hospital groups over the past decade has boosted these customers’ bargaining power, and these blended accounts are now pushing back heavily on price as they grapple with their own budget constraints and regulatory headwinds. Furthermore, visibility surrounding the class action SQ-customer lawsuit (settled last year) sparked pricing concession among independent healthcare practice accounts as well. That said, we don’t think Stericycle is in a perpetual state of decline and, in our view, the firm isn't losing its footing against its small regional peers. For one, its core med-waste network enjoys sustainable competitive advantages rooted in route density. We also expect the bulk of SQ-account pricing concessions to work in by the end of 2019. Moreover, although management’s multiyear turnaround program (including a major ERP updgrade) will hit profitability in the years ahead, it should result in better internal controls, higher visibility, and improved execution.