Stericycle Profits Rise Despite Revenue Declines

Stericycle reported stronger profitability in the third quarter despite experiencing slower top-line growth both year over year and sequentially. Seventeen acquisitions contributed toward an increase in revenue by 11.3% to $535 million in the quarter; however, consolidated internal growth of 6.5% was on the low end of Stericycle’s typical target range.

In particular, domestic small quantity (SQ) revenue grew organically by 8%, and large quantity (LQ) grew by only 5% despite a slightly larger increase in customer account growth year over year. Including the impact of acquisition-related expenses and other nonrecurring items in the quarter, operating margins expanded by nearly 150 basis points to 25.3%.

However, the majority of the improvement can be attributed to a nonrecurring loss on the sale of a business that was completed in 2012. Excluding this one-time item reveals a more modest improvement of 40 basis points. In light of these results, we reiterate our fair value estimate of $100 per share.

In our opinion, any other waste company would cheer mid-single-digit improvement in internal growth along with modest margin expansion. However, wide-moat Stericycle’s shares have historically commanded premium multiples based on outsize growth expectations. We don’t believe one softer quarter is cause for concern; however, these results are consistent with our hypothesis that the more mature domestic market is in need of some catalysts in order to sustain historical growth rates.

It appears that the Affordable Care Act is motivating health-care institutions to consolidate service vendors into master contracts, an ongoing trend that may slow the sales cycle in the near-term. However, Stericycle’s ability to provide customers with a wide range of services may give the company an edge longer-term. However, if near-term domestic growth continues to disappoint, patient investors may be rewarded with a more attractive entry point for wide-moat Stericycle’s shares.

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