Susceptibility in Operations: Stericyle


Stock: (ticker SRCL) 
Business as usual in more than 70% of its operations should provide some comfort

Stericycle’s share price has experienced one-year lows recently. As a result, the company has underperformed the broader S&P 500 market so far this year having generated 6.4% total losses compared to the index’s 13.33% (Morningstar).

The company recorded losses in its recent quarter leading to no trailing earnings multiple but now trades nearly 50% off from its three-year PS and PB averages.

The $6 billion Illinois-based waste management company reported $95.4 million in losses for its recent nine months of operations despite its 2.5% increase in revenue to $1.81 billion.

Total costs and expenses for the waste collector were 24% higher resulting to its losses for the period.

According to filings, the company recorded $295 million litigation and professional services expenses related to a Proposed MDL Settlement.

According to BusinessWire, Stericycle and certain of its executives were sued in a securities class action lawsuit charging them with failing to disclose material information, violating federal securities laws. Further, Stericycle executives have been accused of insider sales of more than $55 million. Stericycle was also sued in class action lawsuits by its customers and recently announced a $295 million proposed settlement of the litigation.

Stericycle was founded in 1989. According to filings, Stericycle is a business-to-business services provider with a focus on regulated and compliance solutions for healthcare, retail, and commercial businesses. This includes the collection and processing of regulated and specialized waste for disposal and the collection of personal and confidential information for secure destruction, plus a variety of training, consulting, recall/return, communication, and compliance services.

Further, the company operates integrated operations and customer service networks in the United States and 21 other countries.

Stericycle’s worldwide networks include a total of 252 processing facilities, 102 other service facilities, 340 transfer sites, and 3 landfills.

The company has two segments: Domestic and Canada RCS, and International RCS.

Stericycle’s Domestic and Canada, and International Regulated Waste and Compliance Services segments include medical waste disposal, pharmaceutical waste disposal, hazardous waste management, sustainability solutions for expired or unused inventory, secure information destruction of documents and e-media, training and consulting through its Steri-Safe® and Clinical Services programs, and other regulatory compliance services.

The company’s Domestic Communication and Related Services segment consists of inbound/outbound communication, automated patient reminders, online scheduling, notifications, product retrievals, product returns, and quality audits.

Domestic and Canada RCS
In the first half, revenue in the segment grew 2.9% year over year to $1.28 billion (71% of sales) and registered an EBITA margin of 30% (same as year-earlier period).

International RCS
In the first half, revenue in the international segment fell 5.5% year over year to $361.6 million (20% of sales) and EBITA margin of 11% compared to 9% a year earlier.

According to filings, the company experienced about 5.6% secondary to the effects of foreign exchange rates, which unfavorably impacted international revenues, as foreign currencies declined against the U.S. dollar.

Sales and profits
In the past three years, Stericycle registered 18.46% revenue growth average, contrasting 12.8% decline average, and profit margin average of 8.8% (Morningstar).

Cash, debt and book value (equity)
As of June, Stericycle had $44.2 million in cash and cash equivalents and $2.86 billion in debt with debt-equity ratio 1.04 times compared to 1.11 times a year earlier. Overall debt declined by $258 million year over year while equity decreased by $68 million to $2.75 billion.

77.8% of Stericycle’s $7.04 billion assets were goodwill and intangibles.

Cash flow
Despite the losses, Stericycle’s cash flow from operations declined by 3.3% year over year to $237.1 million in the first half. The company recorded higher cash flow in relation to its receivables, asset impairment charges and loss on disposal, and significant amount of accrued liabilities compared to its year earlier operations.

Capital expenditures were $63.1 million leaving the company with $174 million compared to $179 million a year earlier. The company raised $5 million in share issuance while allocated $121 million in debt reduction (net repayment and other financing activities. Dividend payouts represented 10% of its free cash flow in the period.

The cash flow summary
In the past three years, Stericycle allocated $337 million in capital expenditures, raised $1.3 billion in debt net repayments and $897 million in share issuances, generated $1.05 billion in free cash flow, and paid out $446 million in dividends and share repurchases at an average payout ratio 44%.

At first glance, Stericycle could have been unappealing brought by its declining sales operations overseas. A closer look, however, should tame this specific concern brought by unfavorable foreign currency fluctuations that the company could control less about. Further, international revenue generated 20% of the company’s sales in the period.

Stericycle exhibited a leveraged balance sheet with significant amounts of goodwill and intangible assets while having kept relatively conservative payouts to shareholders in recent years while having raised much cash from debt and share issuances.

Meanwhile, according to Businesswire, Stericycle has been susceptible to consumer backlash and litigation resulting from fraudulent billing practices reportedly dating back many years (consisting of hidden and/or unfounded rate increases, fees, and surcharges imposed on purportedly flat-fee customers). This resulted in widespread customer complaints and cancellations culminating in significantly lower financial results for Q3 2015 though Q2 2016.

Further, on June 12, 2017, the SEC issued a subpoena to Stericycle, requesting documents and information relating to the Company’s compliance with the Foreign Corrupt Practices Act (FCPA) or other foreign or domestic anti-corruption laws with respect to certain of the Company’s operations in Latin America. In addition, the Department of Justice has notified the Company that it is investigating this matter in parallel with the SEC.

These historical and current troubles could be very well present the red flag signs that investors should consider.

Meanwhile, Stericycle has an average analyst overweight recommendation with a target price of $91 a share vs. $72.12. Applying three-year average multiple on average revenue estimates this fiscal year with a 50% margin indicated a per share figure of $71.82.

In summary, Stericycle is a cautious buy with $85 a share target price.

Charlie Alutto, President and Chief Executive Officer
“This quarter we continued to see strong performance from our Secure Information Destruction Services and Communication and Related Services. We also reached a preliminary settlement to the small quantity medical waste customer class action lawsuit.”

“This preliminary settlement not only reduces the uncertainty and expense of continued litigation, it is an important step toward putting this matter behind us and allowing our team to focus on our customers and the growth of our business.”

Disclosure: I do not have shares in any of the companies mentioned.

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