SRCL - Stericycle: More Positive Surprises Ahead

2023-06-21 02:40:03 ET

Summary

• SRCL has left its full-year guidance intact, even though its Q1 2023 headline sales and organic revenue growth rates were above expectations.
• Stericycle appears to have the intention of executing on more value-accretive divestments and acquisitions in the future.
• I maintain my Buy rating for SRCL, as there are more potential positive surprises ahead for investors relating to its financial performance and portfolio optimization activities.

Elevator Pitch

I continue to rate Stericycle, Inc. ( SRCL ) stock as a Buy. My opinion is that SRCL has the potential to surprise the market with better-than-expected results and value-accretive portfolio optimization initiatives. Positive surprises should drive Stericycle's share price upwards, and this explains why I have chosen to retain a Buy rating for SRCL.

SRCL Kept Full-Year Guidance Unchanged Despite Above-Expectations Q1

In my prior write-up for Stericycle published on April 10, 2023, I stressed that "SRCL's conservative guidance leaves room for positive surprises." I was proven to be right, taking into account SRCL's most recent quarterly financial performance.

Stericycle's actual Q1 2023 top line and normalized earnings per share exceeded the Wall Street analysts' consensus financial forecasts by +2.1% and +11.4%, respectively as reported by Seeking Alpha News . In addition, SRCL achieved an impressive organic revenue growth rate of +7.2% for Q1 2023, which was way higher than the mid-point of the company's FY 2023 organic revenue growth guidance in the +3%-5% range. Notably, Stericycle's stock price jumped by +9.1% on the day (April 27, 2023) the company's first quarter results were announced.

But SRCL's management continued to be very prudent about setting expectations for the company's full-year performance. At its Q1 2023 results call , Stericycle emphasized that "our guidance ranges remain the same." Specifically, SRCL is expecting to report an organic revenue growth rate of +3%-5% and a non-GAAP adjusted EPS of between $1.75 and $2.05 for fiscal 2023. This is the same as Stericycle's initial FY 2023 financial guidance issued in February this year when SRCL announced its FY 2022 results.

As I noted in my April 10 update for SRCL, I am of the view that Stericycle's "actual volume growth for the regulated waste and compliance services business" for 2023 "is most probably going to surpass the market's expectations." While SRCL has conservatively maintained the company's financial guidance for the current year, there are signs pointing to Stericycle delivering positive surprises again in subsequent quarters.

Stericycle revealed at the company's first quarter earnings briefing that it had witnessed "hospital staffing levels shoring up" and the "return of elective surgeries", which should drive an increase in medical waste. These are expected to be tailwinds for SRCL's regulated waste and compliance services business.

On the flip side, the market's expectations of Stericycle are still pretty low, notwithstanding SRCL's good top line performance for Q1 2023. Of the eight analysts covering SRCL's shares, half of them cut their FY 2023 sales estimates for Stericycle in the past three months. Specifically, the consensus 2023 top line forecast for SRCL was lowered by -19.6% in the last six months.

In my opinion, Stericycle has a reasonably good chance of reporting better-than-expected financial results for the remainder of the year. Potential positive surprises for SRCL aren't limited to its financial performance; Stericycle's portfolio optimization initiatives could also act as re-rating catalysts for the stock as discussed in the next section.

Portfolio Optimization Is A Work-In-Progress For Stericycle

SRCL is very likely going to continue restructuring the company's portfolio to boost shareholder returns.

In terms of potential divestments, Stericycle noted at its Q1 2023 earnings call that it will evaluate "all the markets" and determine "where is our opportunity not just to grow but to grow profitably in terms of our expectations for us to really drive the company forward."

As per the company's FY 2022 10-K filing , SRCL derived 79%, 14%, and 7% of its top line from the US, Europe, and other markets, respectively. Considering its revenue concentration in the US, it is realistic to expect that Stericycle could have sub-scale operations in certain international markets. As such, there is a high probability of SRCL selling off some of its assets or businesses in foreign markets going forward.

On the other hand, Stericycle might be considering the allocation of excess capital to accretive M&A (Mergers & Acquisitions). Starting in 2019, SRCL has executed on 13 divestments and only a single acquisition as revealed at its most recent quarterly results briefing. Stericycle also noted at the company's first quarter analyst call that "as we get to 2024, we may have opportunities for other use of capital" apart from deleveraging and capital reinvestment.

Stericycle's management comments cited above suggest that the company could be ready to recycle capital generated by prior divestments into accretive M&A deals.

In a nutshell, portfolio optimization activities, be it divestments or acquisitions, offer opportunities for Stericycle to boost shareholder value, and these could be another source of positive surprises for SRCL.

Concluding Thoughts

Stericycle has surprised the market with its Q1 2023 financial performance, and I believe that there are more positive surprises in store for SRCL's investors. Accretive M&A deals and quarterly earnings beats could be positive surprises that become re-rating catalysts for SRCL. In view of the above-mentioned factors, I continue to assign a Buy rating to Stericycle.

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