Stericycle: Restructuring Weighs, Shares Attractive
Restructuring efforts will yield material longer term benefits, but at today's price, shares offer an attractive margin of safety to patient investors willing to stomach near-term volatility.
Stericycle’s (SRCL) fourth-quarter top line fell 2.6% (organically) year over year, mostly in line with our expectations. Relative to the same period last year, lower revenue stems in part from a significant recall project in fourth-quarter 2016 (in the communications services unit), which made for a tough comparison. Weakness this year in the global manufacturing and industrial portfolio and ongoing pricing pressure among small-quantity, or SQ, medical waste accounts also played a role. That said, Shred-it continues to see healthy growth, along with strength in selling new services to hospital accounts in the flagship regulated waste business. We also note that pricing compression among SQ accounts--a key headwind over the past year-plus--doesn’t appear to be accelerating. Adjusted gross and operating margins came in below our forecast, likely because of cost pressure in Europe and elevated investments linked to the firm’s new business transformation endeavor.
During the fourth quarter, the firm launched a comprehensive business transformation initiative aimed at standardizing and consolidating its global processes. While we expect restructuring efforts (including a sizable ERP implementation) to yield material longer-term benefits, heightened costs and investment will weigh on near-term profitability. Given slightly more clarity on cost impact, including lower-than-expected EBITDA guidance for 2018, we expect to temper our margin assumptions for the next several years. As a result, we expect to reduce our fair value in the ballpark of 5%-10%. However, in our view, the shares are undervalued, offering an attractive margin of safety to patient investors willing to stomach near-term volatility.
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Matthew Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.