This is one of the most incredible monthly charts I’ve ever seen:
SRCL IPO’ed in 1996, and has appreciated in almost a straight line ever since. The stock’s largest peak-to-trough decline was in 2008, when it declined from a high of $66.15 to a low of $46.45, or around 30%. The stock is worth about 70 times what it was worth 17 years ago. Talk about appreciation without much downside volatility!
SRCL is in the waste business. Not just ordinary garbage, but medical waste. This company is doing the dirty work no one else wants to touch, and reaping the returns as a result. Here is the company description:
Our primary business comprises disposal services for medical and biohazardous waste. We serve hospitals, laboratories, physician practices, dental clinics, long-term care facilities, as well as numerous other businesses, facilities, and healthcare providers that generate sharps or potentially infectious material. Within the United States, we maintain the nation’s largest network of medical waste transport vehicles, collection sites, and treatment facilities.
Stericycle was incorporated in 1989 in Illinois, and went public in 1996. The stock’s incredible, uninterrupted appreciation has been driven by equally impressive earnings growth – over the last 10 years, the stock has grown earnings by 10-25% in every single year, an amazingly consistent record.
This company is no small fry. It’s a $10 billion market cap company with $2.1 billion in expected revenues in 2013. Clearly, Stericycle has been a major beneficiary of the secular growth in the medical industry in the U.S. It has recently ramped up its international growth, mainly via numerous small acquisitions (29 international acquisitions through the first three quarters of 2013 alone). The U.S. still accounts for 75% of revenues. Yet, the company is using its international acquisition strategy to generate revenue growth, given the slowing of its U.S. revenue growth, as the size and reach of the domestic business has grown.
How has the company grown earnings so consistently for so long? Why hasn’t more competition entered the sector, as is prone to happen for any area that has such consistent profit growth?
I see three main reasons for Stericycle’s continuing competitive advantage:
1) Stericycle has done a terrific job of vertically integrating the business, adding on a variety of services as it has expanded and grown. From what started as a simple disposal service for medical and biohazardous waste, the business has expanded to include a regulated recall and returns management segment and a patient communications segment. Both of those areas work closely with medical providers too, thereby leveraging the existing customer base in a cost effective manner.
2) Stericycle’s aggressive acquisition strategy has likely prevented nascent competition from building steam. Management has done an admirable job of making numerous small acquisitions over the years (again, 29 international acquisitions already in 2013, and 12 domestic acquisitions as well). That strategy has probably nipped competition in the bud, and in the process, SRCL has become the largest regulated medical waste management company in the country. It’s now much easier to be profitable from the perch of a market leader.
3) Dirty, Highly Regulated Business. Barriers to entry are higher than in most sectors, with few outsiders interested in getting involved given the lack of glamour. Of course, that has worked out quite well for the pocketbooks of SRCL investors.
Finally, the secular growth prospects of the industry are a major positive too. Significant tailwinds for health care delivery and management are likely to continue to exist for many years to come. Demographics and regulatory trends globally are in Stericycle’s favor.
In short, the fundamentals of this business, its competitive moat, and future growth prospects all look attractive. Earnings and revenues have moved up in a straight line for more than a decade now. Granted, expected earnings growth is in the 10-15% range over the next few years, lower than the 15-25% earnings growth the company experienced over much of the past decade. That’s natural for a company that has become a much larger business overall.
But what about the valuation? Here’s the 10 year chart of trailing 12 month P/E for SRCL:
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SRCL Trailing 12 month P/E, Courtesy of Bloomberg[/caption]
The multiple is actually around the mid-point of the last 10 years. One concern is that expected future earnings growth is expected to be lower than in the past, so a lower valuation could be warranted.
In that sense, I don’t view the stock as attractive here. However, a move back down to the 25x P/E multiple area, and I would be interested in adding this stock to my long-term portfolio, given the company’s numerous advantages and clear management expertise.
That incredible stock chart I showed at the outset shows several strong long-term moves higher, followed by a couple years of consolidation. Perhaps, we’re at the start of another consolidation period. My preference, however, would be that the stock price corrects through price (a swift correction) rather than through time (consolidation). This is a stock I would like to own at the right price.