Stericycle (SRCL) Rides On Acquisitions, Debt Woes Remain

So far this year, shares of Stericycle, Inc. (NASDAQ:SRCL) have gained 33% compared with 20.1% rise of the industry it belongs to and 12.4% rise of the Zacks S&P 500 composite.

Recently, the company reported first-quarter 2019 adjusted earnings of 57 cents per share, which lagged the Zacks Consensus Estimate by 30 cents and decreased 52.9% year over year. Total revenues of $830.1 million missed the consensus mark by $34 million and declined 7.3% year over year on a reported basis and 3.9% on an organic basis.

What’s Driving Stericycle?

Stericycle is progressing well with its comprehensive multiyear Business Transformation, aimed at improving long-term operational and financial performance. Initiated in 2017, the five key initiatives of the program include portfolio rationalization, operational optimization, organizational excellence and efficiency, commercial excellence and strategic sourcing.

In 2018, Stericycle realized adjusted EBITDA of $64 million from these initiatives. The company is currently in the build phase of the ERP system that will continue through the first half of 2019. The company expects to witness $850 million to $1 billion of adjusted EBITDA benefits over the tenure of the program. Adjusted EBITDA and adjusted earnings are anticipated to register annual growth rate of 5-9% and 6-10%, respectively, between 2018 and 2022.

Acquisitions have been contributing to Stericycle’s top-line growth. In first-quarter 2019, acquisitions contributed $6.8 million to revenues. In 2018, 2017 and 2016, acquisitions contributed $29.7 million, $32.2 million and $570.1 million to revenues, respectively. Notably, the company completed 21, 30 and 31 acquisitions, respectively, in 2018, 2017 and 2016. The acquisition pool of the company remains robust in multiple geographies and lines of business, thereby helping it increase its market share and expand geographically.

By providing business-to-business services in highly regulated areas, Stericycle intends to help its customers and businesses to comply with tough regulatory policies. It mainly targets smaller businesses with high demand for regulatory assistance compared to larger businesses due to the lack of specialized staff. We believe that this business strategy will help the company earn profits as well as expand its offerings.

Risks

Stericycle has a highly leveraged balance sheet. As of Mar 31, 2019, long-term debt (net of current portion) was $2.70 billion while cash and cash equivalents were $48.2 million. Such a cash position implies that the company 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.

Decline in Communication and Related Services businesses is weighing on Stericycle’s top line. A highly-competitive waste management industry will put Stericycle under pricing pressure. Global presence exposes Stericycle to foreign currency exchange rate fluctuations.

Zacks Rank & Stocks to Consider

Stericycle currently 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 WEX (NYSE:WEX) , Navigant Consulting (NYSE:NCI) and FLEETCOR Technologies (NYSE:FLT) . While WEX and Navigant Consulting sport a Zacks Rank #1, FLEETCOR carries a Zacks Rank #2 (Buy).

Long-term expected EPS (three to five years) growth rate for WEX, Navigant Consulting and FLEETCOR is 15%, 13.5% and 16.5%, respectively.

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