Stericycle (SRCL) - Waste management franchise at unassuming price

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Copyright 2016 Intelligent Investors.co.uk. All rights reserved. This document is provided for information purposes only and should
not be construed as an offer or solicitation for investment.
Intelligent Investors.co.uk
Stericycle (SRCL)
Medical Waste Franchise at Unassuming Price
Investment Thesis:
Stericycle is the largest US regulated medical waste disposal company with
strong competitive position in an attractive and growing niche. Stericycle has
branched out into adjacent business services such as secure information
destruction markets and industrial waste disposal. Stericycle has historically
acted as an industry consolidator growing market share, cross selling adjacent
services, building up infrastructure and spreading the cost of running waste
disposal network over higher volumes thus lowering overall cost.
Recent share price drop due to number of profit warnings has created a
potentially attractive entry opportunity to aquire Stericycle shares as an
unassuming price.
Valuation:
Stericycle is trading at $87 with fair value range of $90 based on 17.3 PE
multiple of adjusted 2017 EPS forecast ($5.20).
Business model
Stericycle is a business-to-business services provider with a focus on regulated
and compliance solutions for healthcare, retail, and commercial businesses.
This includes the collection and processing of regulated and specialized waste
for disposal and the collection of personal and confidential information for
secure destruction, plus a variety of recall/return, communication, and
compliance services. Stericycle operates integrated operations and customer
service networks in the United States and 21 other countries. Stericycle
worldwide networks include a total of 253 processing facilities, 358 transfer
sites, and 137 other service facilities. Stericycle solutions for regulated or
specialty waste streams include: medical waste disposal, pharmaceutical waste
disposal, hazardous waste management, sustainability solutions for expired or
unused inventory, and secure information destruction of documents and e-
media.
SRCL builds on its core regulated
medical waste disposal franchise with
wide competitive advantages
underpinned by a dense network of
collection routes, processing facilities
and disposal locations, compliance with
Company Research
USA
Industry – Waste Management
3 Year Opinion Defensive
Competitive Adv. Wide
Fair Value Potential $90.00
Price $86.77
Consider Buying at $87.00
Date 13 August 2016
Market Data
52 Week Range 81.99-151.57
Market Cap. $7.39bln
Shares Outstanding 84.9 mln
Volatility Medium
Balance Sheet Data
Shareholder equity $2.73bln
Price/Book Value 2.65
Net Debt/(Cash) $3.2bln
Debt/EBITDA 3.3x
Forecast Earnings
Potential price appreciation 3%
Dividend Yield/Share rep. 0.0%
EPS / PE Cons.
Period EPS PE
Dec 2015 $4.40 19.7
Dec 2016 $4.69 18.6
Dec 2017 $5.20 16.7
Dec 2018 $5.88 14.8
5 Year Share Price Chart

DISCLAIMER
Stericycle (SRCL)
complex regulatory permits regime, long-term customer relationships characterised by recuring revenues
for no hassle bundled range of disposal service and cost advantages stemming from network
effects/efficient scale in the markets served (i.e. Stericycle displays utility type of economic model).
SRCL is operating in highly fragment markets with many small providers and many small quantity
customers, and is thus able to deploy its competitive strenghts to consolidate competitors, gain market
share and drive the cost down. SCRL business model has characteristics of utility type franchise with
economies of scale at work but unlike utility it isn’t subject to price regulation.
SCRL diversified into industrial waste disposal and secure information destruction markets which display
similar economic characterics of economies of scale, complex regulation and network efforts. However,
these adjacent markets are more volatile, because fixed costs of operating disposal facilities are not
matched by predictable recurring revenue that core regulated medical waste disposal franchise offers,
leading to fluctuating profits.
Focus on the Small Customer with Recurring Service Need
Stericycle business strategy recognizes that smaller businesses have an even greater need for support with
compliance matters since they tend to lack the specialization of staff resources that is found among larger
businesses and hospitals. With a small business, regulatory and compliance matters are often managed by
a business owner, office manager, or facility supervisor who manage multiple functions for the
organization and often lack the time and resources to properly investigate and comply with a wide range of
regulations that may impact their operation. In response to this unmet need of small businesses, Stericycle
developed comprehensive, no-hassle compliance programs which feature scheduled service at low, flat
monthly fees. This business fundamental has guided Stericycle as the company has expanded into
additional service offerings including hazardous or pharmaceutical waste management, communication
services, and secure information destruction.
Organic Growth
As a leading provider in regulated and compliance solutions, Stericycle continues to focus on enhancing our
service offerings and platforms. Stericycle has developed a strong and loyal customer base, with a revenue
retention rate exceeding 90%, and has been able to leverage these customer relationships to provide
additional services. Allocation of sales resources has and will continue to focus on driving incremental
organic growth from cross selling and upselling various services in our portfolio.
Growth through Acquisition
The various regulated waste and compliance services that Stericycle provides tend to be in highly
fragmented industries. Stericycle has proved that acquisitions are a rapid and efficient way to scale
operations, build critical customer density for transportation and treatment operations, and enter
new markets or geographies, as well as an opportunity to introduce our additional services to the

DISCLAIMER
Stericycle (SRCL)
acquired customers. In early history, acquisitions were a key strategy to building customer base and route
density in the United States. Over the company’s history, Stericycle has completed 435 acquisitions, with
230 in the United States and 205 internationally. During 2015, Stericycle completed 43 acquisitions.
Company expects to continue the acquisition strategy in North America and internationally, remaining
focused on small, highly accretive, tuck in acquisitions that broaden various service capabilities while
creating value for our shareholders.
SRCL operated in highly regulated medical waste
market which is subject to numerous regulations. In
many countries there are multiple regulatory agencies
at the local and national level that affect the services.
This statutory and regulatory framework imposes a
variety of compliance requirements, including
requirements to obtain and maintain government
permits. These permits grant SRCL the authority, among
other things:
• to construct and operate collection, transfer and
processing facilities;
• to transport regulated waste within and between relevant jurisdictions; and
• to handle particular regulated substances.
The permits must be periodically renewed and are subject to modification or revocation by the
issuing authority.
Strict enforcement of laws and regulations relating to regulated waste collection and treatment and the
proper handling and protection of personal and confidential information by governmental authorities can
have a positive effect on SRCL business. These laws and regulations increase the demand for SRCL services.
Relaxation of enforcement or other changes in governmental regulation of regulated waste and personal
and confidential information could increase the number of competitors SRCL faces or reduce the need for
its services.
Competition
The industries and markets in which SRCL operates are highly competitive, and barriers to entry are low.
SRCL competitors consist of many different types of service providers, including national, regional and local
companies. In the regulated waste and secure information destruction industries, another major source of
competition is on-site treatment. For regulated medical waste, some large-quantity generators, particularly
hospitals may choose an onsite autoclave or other treatment process. For secure information destruction,
many businesses may choose to use small, on-site shredders for their documents. Similarly, customers
could handle recalls or communication solutions internally.

DISCLAIMER
Stericycle (SRCL)
In addition, SRCL faces potential competition from businesses that are attempting to commercialize a wide
range of technologies that directly or indirectly reduce the need for regulated medical waste, hazardous
waste or secure information destruction services.
Competitive position
Stericycle enjoys high regulatory barriers to entry including government regulation, high cost / hard-to-
obtain permits to build extensive waste handling infrastructure, highly fragment waste mgt markets,
relationships with existing client relationships based on bundled offering/multiple services, and economies
of scale confered by market share leadership position. Stericycle has the wide competitive moat due to it’s
leading position and scale in medical waste disposal that was built over years organically and by
acquisitions. Stericycle has built a network of waste management collection routes, waste handling and
disposal facilities. Such network is hard to establish by
a new player with same level of efficiency and scale,
thus limiting list of potential contractors that clients
can bid out the job to and limiting clients’ bargaining
power. Stericycle service offering based on bundled
no-hassle services encourages strong customer
retention at over 90% and limits pricing incentives for
customers to switch to another provider. Stericycle
makes no secret of its aspirations to cross sell
additional services into client offering including
management of sharp items, prescription drugs
disposal, information destruction, communication
solutions, compliance and others.
Market Size and Growth Potential
Stericycle provides a wide range of services across multiple market segments and industries. Company
believes that in 2016, the size of the global market for the services, in the geographies company currently
operates in, is approximately $33 billion. Industry growth is driven by a number of factors.
These factors include:
 Aging of Population: The average age of the
population in the countries where Stericycle
operates is rising. As people age, they typically
require more medical attention and a wider
variety of tests, procedures and medications,
leading to an increase in the quantity of
regulated medical waste, hazardous waste,
and pharmaceutical waste, as well as an

DISCLAIMER
Stericycle (SRCL)
increase in confidential healthcare records requiring secure destruction.
 Pressure to Reduce Healthcare Costs:The healthcare industry is under pressure to reduce costs.
Stericycle services can help healthcare providers to reduce their handling and compliance costs
and to reduce their potential liability for employee exposure to bloodborne pathogens and other
infectious agents. In addition, hospital institutions and smaller healthcare practices continue to
outsource compliance, communication, and secure information destruction services.
 Enforcement of Regulations: Enforcement of regulations relating to the management of regulated
waste and protected information is increasing. Penalties for violations can be costly as well as high
profile thereby impacting a business’ overall reputation. Greater enforcement combined with
higher penalties results in more compliance by waste generators and a corresponding increase in
potential customers.
 Safety and Security Regulation: Many businesses that are not currently using third party regulated
waste management or secure information destruction services are unaware either of the need for
proper training of employees or of the regulatory requirements regarding the handling of such
materials.
 Increased Business Focus on Sustainability: Businesses large and small continue to realize that
focus on sustainability is now a business essential in order to operate efficiently and meet the
increasing demands of customers for environmental responsibility. Such pressures are driving
proper disposal of pharmaceuticals, recycling efforts, creative disposal efforts for unused inventory
and shred-all policies for paper.
 Shift to Off-Site Healthcare Treatment: The patient care in the U.S. is continuing to shift from
institutional higher-cost acute-care settings to less expensive, smaller, off-site treatment
alternatives, with a resulting increase in the number of healthcare providers generating regulated
medical waste, pharmaceutical waste, and protected health information requiring secure
destruction.
 Regulation of Privacy and Information Security and Concerns over Data Breaches: Continued
development and growth of the secure information destruction industry have been driven, in part,
by compliance with government regulations in respect of privacy and information security.
 International Market Development: The development of regulated medical waste regulations,
hazardous waste regulations, and secure information destruction regulations in certain
international markets are at an early stage of development relative to North American and certain
European Markets. As emerging markets continue to advance their healthcare practices,
environmental controls, and their data privacy regulations, further demand is expected.
Key risks to the thesis
- Consolidation of small quantity players by large healthcare providers and related pricing pressure on
core services
- Lack of quality acquisition targets available at reasonable prices
- Volatility of demand in industrial waste segments in line with general economic environment

DISCLAIMER
Stericycle (SRCL)
- Continued losses/ low profitability in international markets
- Large debt load of circa $3bln USD
Valuation Scenario analysis
Scenario Price target Triggers
Bull case $105 Higher international growth, shift towards higher
margin small quantity customer
Base case $90 Steady low single digit growth, maintain
profitability in the core business, realize synergies
and growth from concluded aquisitions
Bear case $75 Further profitability deterioration in core medical
waste management business due to pricing
pressures, industrial waste profitability
deterioration due to economic cycle
Risk profile
SCRL has relatively low business risk profile, however high PE ratio makes share price vulnerable to even
the smallest earnings expectation miss. SCRL has a wide competitive advantage in an attractive market
niche and we expect that over time the favourable economics will re-assert themselves and business will
get back to sustainable growth trajectory
Author’s opinion
Stericycle is a unique franchise in a growing market niche with strong competitive position and plenty of
growth ahead. Stericycle share price has declined sufficiently to warrant modestly adding to SRCL position
starting from $87 level at no more than 1/3 of the target purchase value and execute any additional
purchases at $7 intervals i.e. at $80 and $73 in the event of further decline.
$105.00 (+20%)
$75.00 (-14%)
$90.00 (+3%)

DISCLAIMER
Stericycle (SRCL)
We put our money where our mouth is as the author(s) of the report may presently or in the future hold
a common stock investment in the securities mentioned in this report.
This report has been prepared by Intelligent Investors.co.uk.
DISCLAIMER
Copyright 2016 Intelligent Investors.co.uk. All rights reserved. This document is provided for information
purposes only and should not be construed as an offer or solicitation for investment.
All information used in the publication of this report has been compiled from publicly available sources
that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report.
Opinions contained in this report represent those of the research department of Intelligent Investors.co.uk
at the time of publication. The author(s) of the report hold a common stock investment in the securities
mentioned in this report. The research in this document is not intended for retail investors. This is not a
solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. This document is
provided for information purposes only and should not be construed as an offer or solicitation for
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buy, sell or obtain accurate information about the value of securities mentioned in this report. Past
performance is not necessarily a guide to future performance.

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