SRCL - Stericycle: Consider Long-Term Outlook And Potential M&A

2023-11-15 15:14:20 ET

Summary

• SRCL is targeting to deliver an impressive +13%-17% EBITDA expansion on an annual basis for the FY 2023-2027 time frame.
• Stericycle might be ready to embark on accretive acquisitions, after having completed 19 asset or business sales in the last five years.
• I retain a Buy rating for SRCL, as I have a positive view of the company's prospects for the long run.

Elevator Pitch

Stericycle's ( SRCL ) stock is still worthy of a Buy rating. My prior September 5, 2023 update drew attention to the company's increasing fleet costs and financial position.

I focus on Stericycle's positive long-term business outlook and the potential for M&A deals in this latest article. I view SRCL's mid-teens percentage EBITDA growth target as achievable, and there could be upside associated with Stericycle's future financial performance if it executes on accretive M&A deals. In view of the stock's positive prospects, I continue to assign a Buy rating to Stericycle.

Favorable Financial Prospects For The Long Run

SRCL published a new investor presentation in the early part of this month in tandem with the company's participation in the Baird 2023 Global Industrial Conference on November 7, 2023.

In the November 7 corporate presentation, Stericycle shared its goal of realizing a "13% to 17% average annual Adjusted EBITDA growth rate" for the FY 2023-2027 time frame, which translates into an estimated yearly +15% EBITDA increase as per the mid-point of its target. As a comparison, Wall Street analysts forecast that SRCL's normalized EBITDA will expand by a CAGR of +15.0% from $414.3 million for the current fiscal year to $724.5 million in fiscal 2027 based on consensus data taken from S&P Capital IQ .

I am of the opinion that SRCL can achieve an annual mid-teens percentage EBITDA expansion over the next couple of years, considering the company's efforts to boost the top line and improve profitability in various ways.

Firstly, Stericycle has included clauses to cover commodity price volatility in its new agreements with clients. For example, SRCL disclosed at its Q3 2023 earnings briefing that its Secure Information Destruction business was "able to offset approximately one-third of the lower SOP (Sorted Office Paper) recycling revenue through our recycling recovery surcharge" for the most recent quarter.

Secondly, SRCL revealed in its third quarter results press release that it "deployed the ERP in the U.S. Regulated Waste and Compliance Services (or RWCS) business" in Q3. As per the company's management commentary at the Q3 2023 results call, Stericycle's ERP deployment has led to improvements for its RWCS business such as integration with its "compliance training platform to create a single solution to meet their (customers') needs" and real-time tracking of "waste at the container level through the entire service life cycle." The RWCS business witnessed a reasonably decent +4.1% increase in organic revenue for Q3 2023, and this business segment's growth prospects are expected to receive a boost from the ERP deployment.

Thirdly, Stericycle has been enhancing the operating efficiency of its business operations in recent times. At the recent Baird c onference, SRCL mentioned that it "opened four new RWCS facilities in 2021 and 2022" and "upgraded 22 facilities" during the same time period as part of its investments to improve efficiency.

SRCL currently trades at 13.1 times (source: S&P Capital IQ ) consensus forward next twelve months' EV/EBITDA. As a rule of thumb, a stock is deemed to be fairly valued if its earnings multiple is equal to its future earnings growth. As such, Stericycle should be able to command a higher EV/EBITDA multiple at the mid-to-high teens level, if the company can meet its FY 2023-2027 EBITDA expansion target.

The Tipping Point For M&A Might Come Soon

Stericycle revealed in its third quarter earnings presentation slides that it sold the "Netherlands dental recycling operations and the UAE SID (Secure Information Destruction) joint venture in Q3 and the Romania operations in Q4."

Taking into account the latest divestitures highlighted above, SRCL has executed on 19 divestments in the past five years. On the flip side, Stericycle has only done a single acquisition during the same time frame.

At its Q3 results briefing, Stericycle noted that "at some point in time, we might get a stable enough balance sheet" after concluding multiple asset sales to "become focused on potential tuck-in acquisitions."

Having already done a significant number of divestitures (19 since 2019 to be exact), it is fair to assume that SRCL is coming close to completing the process of monetizing non-core assets and shrinking the business portfolio. Separately, Stericycle's financial leverage ratio has decreased from 3.28 times at the end of last year to 2.84 times as of end-September this year, after its net debt was lowered by $178 million during this period. The company's current financial leverage is below the 3.0 times limit outlined in its debt agreement covenants.

SRCL's FY 2023-2027 organic revenue CAGR target is a relatively modest +2%-3% as disclosed at the Baird c onference. Assuming that Stericycle steps up on its inorganic growth initiatives going forward, the company's actual top line (organic and inorganic revenue) and EBITDA for the years ahead could potentially exceed expectations.

Final Thoughts

Stericycle still warrants a Buy rating. I am impressed with SRCL's long term EBITDA expansion goal, and I think that the company might start engaging in acquisitions to boost inorganic growth prospects in the near future.

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