A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.
Here we focus on Stericycle, Inc. SRCL, a stock with an expected long-term earnings per share growth rate of 9.6%. Its earnings are expected to register 6.7% and 3.4% growth, respectively, in 2018 and 2019.
The company has outperformed its industry in the past three months. The stock has soared 2.1% against the industry’s gain of 1.1%.
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We believe the stock has the potential to continue the bull run. The reasons behind our optimism include the company’s strategic acquisitions, organic growth coupled with similar prudent business moves.
Let’s discuss them in detail.
Strategic Acquisitions
Stericycle continues to grow on the back of acquisitions in both domestic and international markets. In 2017 and 2016, Stericycle completed 30 and 31 acquisitions, respectively. Further, acquisitions contributed 570.1 million to 2016 revenues and $32.2 million to 2017 revenues. For first-quarter 2018, the contribution from buyouts was $7.1 million.
Stericycle is highly optimistic about “tuck-in” acquisition opportunities, which are expected to create value for shareholders and widen its services suite. In first-quarter 2018, Stericycle closed nine tuck-in acquisitions (all in the domestic market, with eight in Secure Information Destruction and one in Regulated Medical Waste). The deals together contributed about $0.7 million to corporate revenues, with estimated annualized revenues of $8.5 million.
The acquisition pool of the company remains robust in multiple geographies and lines of business. The global acquisition strategy increases Stericycle’s customer base by providing a long-term growth platform for selling multiple services. The company is continuously on the lookout for strategic acquisitions that will grow its market share and expand its geographic base.
Organic Growth
We appreciate Stericycle’s continuous focus on its internal development initiatives. To better meet customer demands, the company has been improving its solution offerings and platforms. This has helped Stericycle built a strong and loyal customer base along with a revenue retention rate of nearly 90%. With the help of these strong client relationships, Stericycle is trying to grow by selling additional services to the existing ones, while securing new customers. In 2017 and 2016,organic growth contributed $20.1 million and $94.6 million to total revenues, respectively.
Other Strategic Business Moves
By providing business-to-business services in highly regulated areas, Stericycle intends to help customers and businesses comply with tough regulatory policies. It mainly targets smaller businesses with high demand for regulatory assistance compared to larger businesses due to the lack of specialized staff. To this end, Stericycle is offering services, depending on the varying customer needs. We believe this business strategy will help the company earn profits as well as expand into additional service offerings like hazardous or pharmaceutical waste management, communication services and secure information destruction.
Moreover, government regulatory bodies require proper and immediate implementation of rules and regulations, trying to protect the overall health environment. This is a major positive for Stericycle, which is focused on providing regulated business-to-business services.
Bottom Line
The aforementioned factors positively impacted Stericycle’s performance in the last reported quarter. In fact, the company outperformed the Zacks Consensus Estimate in two of the trailing four quarters, delivering an average positive surprise of 0.8%. We believe the upbeat performance will continue in the quarters ahead, thus giving investors enough reasons to remain optimistic on the stock.
Zacks Rank & Stocks to Consider
Currently, Stericycle has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the broader Business Services sector include Waste Connections, Inc. WCN, Accenture plc ACN and NV5 Global NVEE. All the stocks carry a Zacks Rank #2 (Buy).
The long-term expected earnings per share growth rates for Waste Connections, Accenture and NV5 Global are 13.3%, 10% and 20%, respectively.
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