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Stock Strategist

Changing Healthcare Landscape Benefits Stericycle

The company has the potential to skew its customer mix from lower to higher margin.

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 Stericycle (SRCL) is well positioned to profit from a changing healthcare landscape. Rising costs have created a permanent need for large-quantity medical waste generators, such as hospitals, to closely manage operational overhead, supporting an industry appetite for outsourced waste disposal. An aging global population will be an important driver of growth in Stericycle’s small-quantity segment, as service delivery and frequency shift from larger, more expensive hospital operations to smaller acute-care or ambulatory clinics capable of increasing patient throughput. As industry operating budgets adjust in response to these secular trends, Stericycle’s rationale for complementing its core medical waste business with other useful services makes sense. However, strained healthcare budgets have also led to increased pricing pressure in Stericycle’s key small-quantity customer category, a headwind that the company is likely to face for the foreseeable future.

In recent years, we’ve seen Stericycle accelerate its evolution from a pure-play medical waste company toward a comprehensive provider of ancillary services. Following the $2.3 billion purchase of Shred-it in 2015 and the $275 million PSC Environmental deal in 2014, we estimate that close to 40% of Stericycle’s consolidated sales now come from document destruction and nonmedical hazardous waste management. Adding these compliance-driven services expanded Stericycle’s addressable market far beyond healthcare into the industrial, retail, legal, and financial landscapes; however, we believe the better potential resides in generating incremental revenue streams from Stericycle’s healthcare customers through bundled service adoption. It remains to be seen how Stericycle navigates the competitive landscape in its newest verticals.

Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.