Morningstar | Stericycle Settles Securities Class-Action Lawsuit; Maintaining FVE, Shares Remain Undervalued
Narrow-moat medical waste specialist Stericycle announced that it reached a proposed resolution to the ongoing securities class-action lawsuit originally filed by shareholders in July 2016 (not to be confused with the much larger $295 million small-quantity-customer class-action settlement funded earlier this year). In the securities class-action suit, shareholders claimed Stericycle imposed excessive price increases on customers and failed to disclose those alleged practices. As part of the settlement, the company admitted "no fault or wrongdoing" and entered the agreement to avoid the cost and uncertainty of litigation.Pending court approval, Stericycle will pay $45 million into a common fund, probably during the first half of 2019, though management expects insurance proceeds to cover the "large majority" of the outlay. We thus expect the cash flow-related impact to be negligible, and we are maintaining our $83 fair value estimate. On the positive side, this puts another point of litigation in the rearview mirror.
Stericycle has seen several headwinds arise over the past several years, and uncertainty remains high (especially given the firm’s multiyear ERP-system rollout), but we think market sentiment is overly negative. In our view, the current valuation offers an attractive entry point for patient value investors willing to stomach near-term volatility.
Stericycle is engaged in the medical and hazardous waste management and secure information services. The company's segments are: North America, and International Regulated Waste and Compliance Services, which provides medical waste management services, pharmaceutical waste services, compliance programs, retail and healthcare, industrial and manufacturing hazardous waste management and secure information destruction; and Domestic Communication and Related Services, which provides appointment reminders, secure messaging, event registration, and other communications mainly for hospitals and integrated delivery network's as well as regulated recall and returns management communication, and logistics.
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