Stericycle (SRCL) Rides On Acquisitions As Debt Woes Linger

Stericycle, Inc. (NASDAQ:SRCL) is currently riding on strategic acquisitions which are benefiting its top line.

Recently, the company reported better-than-expected fourth-quarter 2018 results. Adjusted earnings of $1.03 per share beat the Zacks Consensus Estimate by 8 cents and increased 3% year over year. Total revenues came in at $852.7 million, beating the consensus mark by roughly $4 million but were down 4% year over year on a reported and 1.1% on an organic basis.

Stericycle has an impressive earnings surprise history, having outpaced estimates in three of the last four quarters. It delivered average four-quarter positive earnings surprise of 2.6%.

What’s Driving Stericycle?

Stericycle has been active on the acquisition front in both the domestic and international markets. In 2018, the company completed 21 acquisitions. In 2017 and 2016, the company completed 30 and 31 acquisitions, respectively. Stericycle’s acquisition strategy has been driving its top line. While acquisitions contributed $29.7 million of revenues in 2018, the same contributed $32.2 million and $570.1 million to 2017 and 2016 revenues, respectively.

Stericycle is progressing well with its comprehensive multiyear Business Transformation, aimed at improving long-term operational and financial performance. As part of the portfolio rationalization strategy within Business Transformation, Stericycle completed two divestitures — its remaining hazardous waste business in the United Kingdom and the U.S. non-core clean room services business. The company is also looking for strategic alternatives for the CRS business and other non-core assets and geographies.

Concurrent with the fourth-quarter 2018 earnings release, Stericycle announced closure of the divesture of the U.K.-based texting business, which had been part of CRS. In 2018, Stericycle realized adjusted EBITDA of $64 million from these initiatives.Currently, the company is in the build phase of the ERP system that will continue through the first half of 2019.

Risks

Stericycle has a highly leveraged balance sheet. As of Dec 31, 2018, long-term debt (net of current portion) was $2.66 billion while cash and cash equivalents were $34.3 million. Such a cash position implies that Stericycle needs to generate adequate amount of operating cash flow to service its debt. Also, high debt may limit the company’s future expansion and worsen its risk profile.

Declining revenues from Communication and Related Services (“CRS”) businesses are weighing on Stericycle’s top line. Its vast international presence exposes the company to foreign currency exchange rate fluctuations. Stiff competition is expected to put Stericycle under pricing pressure and can affect its earnings.

Zacks Rank & Stocks to Consider

Currently, Stericycle carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader Zacks Business Services sector are Omnicom (NYSE:OMC) , Robert Half (NYSE:RHI) and Automatic Data Processing (NASDAQ:ADP) . While Robert Half sports a Zacks Rank #1, Omnicom and Automatic Data Processing carry a Zacks Rank #2 (Buy).

Long-term expected EPS (three to five years) growth rate for Omnicom, Robert Half and Automatic Data Processing is 6.9%, 8.4% and 12.8%, respectively.

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