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STERICYCLE (SRCL)

STERICYCLE (SRCL). Ross Pevitz Matt Storkman Shengdong Zhu RCMP Presentation April 10, 2007. Position. May, 2001 Bought 200 Shares Purchase for $19.47 ($3,894) Current Price is $81.92 ($16,384) $12,490 Unrealized Gain 5% of Portfolio. History. 1989- Stericycle founded

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STERICYCLE (SRCL)

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  1. STERICYCLE(SRCL) Ross Pevitz Matt Storkman Shengdong Zhu RCMP Presentation April 10, 2007

  2. Position • May, 2001 Bought 200 Shares • Purchase for $19.47 ($3,894) • Current Price is $81.92 ($16,384) • $12,490 Unrealized Gain • 5% of Portfolio

  3. History • 1989- Stericycle founded • Medical Waste Tracking Act • Strict regulations for dealing with Medical Waste • Afford convenient, cost effective, and efficient solutions • 1993- Acquired over 116 companies since 1993 • 1996- IPO • 2000- North America’s Largest Provider of regulated Medical Waste Management Services

  4. Company Background • Headquarters in Lake Forest, IL • Largest and Only Full-Service Provider • 351,700 Accounts • Growing Presence Internationally • Major operations UK, Ireland, Mexico, Canada, Brazil, Argentina, South Africa, Australia, and Japan

  5. Products and Services • Mission: Help healthcare organizations reduce risk, provide a safer workplace, and stay in compliance with national, state, and local regulations. • Offer collection, transportation, treatment, disposal, and recycling of medical waste • Treatment: Incineration (burn), Proprietary Autoclaving (steam) ^Proprietary ETD, Electro-Thermal Deactivation (grinding) • Stericycle • Medical Waste Services • Bio-systems • **Sharps Management • Water Management Service • RX Waste Compliance Program • **Pharmaceutical Services

  6. Products and Services • Offer training, educational, consulting, and documentation services • (Steri-Safe) • OSHA and HIPPA Compliance– Occupational Safety and Health Administration, Health Insurance Portability and Accountability Act • Product Sales

  7. Industry Supply • Fragmented • Local Providers, Onsite Treatment, Alt. Treatment • Competitive • Drive Cost, Quality, and Geographic location • Highly Regulated • EPA, DEA, FDA, OSHA, DOT, State/Local • Insulated from Economic Cycles • LT contracts, Nature of Industry • Large Account Customers vs Small Account Customers

  8. Industry Demand • Pressure to Reduce Healthcare Costs • Aging Population • Baby Boomers • Better Health Care • Stricter Environmental and Safety Regulations • Larger Fines and Unaware market

  9. Economic Risks • Interest Rate, Inflation, GDP, Competition • Energy Costs • Transportation and Treatment • Foreign Exchange Risk • Changing Government Regulations!!! • Patent and Trademark Expiration • Liabilities and Insurance • Clean up costs, personal injury, ect.

  10. Competitive Advantages • Established Brand Name and Market Leader • Strong Management Team • Low Cost Operator • Economies of Scale • Full Service Provider • Vertically Integrated, growing Horizontally • Loyal and Diverse Customers • Revenue retention >95% • Largest customers <2% of Revenues • LT contracts with automatic renewal and price ↑ provisions

  11. Company Growth • Shift From Large to Small Customers • Bigger Gross Margins • 55-60% small vs 15-30% large • Expand Range of Services and Products (Organic) • Expand Bio-Systems • Since acquisition of Scherer Healthcare, Inc. in January 2003 • Grow Pharmaceutical Services • Proprietary data system to remove expired or unsafe products

  12. Company Growth • Continue Acquisitions • Focus on strategic “tuck in” • Proven Integrator ~ 116 acquisitions since 1993 • Mainly Asset Purchases • Price determined by multiples of EBITDA and quality of asset Revenues

  13. Company Growth • Increasing Margins • Sell Premium Steri-Safe Service • Customer Size • Acquisitions- lagged • Slightly Offset • Bio-systems • Int’l Emergence EBIT CAGR- Compound Annual Growth Rate Margins

  14. Company Growth • Global Markets • Expand Technology Licensing • Australia, Brazil, Japan and South Africa • Acquire Lead Position • Canada and UK • JV or Partnership • Mexico and Argentina • Small Initial Outlay • Very Selective in Process

  15. Cash Flow Valuation Model • Revenue growth projected to continue, through both organic growth and steady acquisitions • Assets for sale amount booked in 2006 is expected to be liquidated in 2007 for cash inflow (net $26.5M) • Continuing trend of acquisitions, though with lower margins • Acquisitions have been paying off as margins have held steady and have even increased from 1999

  16. Discounted Cash Flow • WACC calculated to be 6.93% • This figure was based on the highest beta estimate of 0.4 (provided by Bloomberg) • Other agencies have estimated negative and zero Beta • Cap structure is 86% equity (market value) • Cost of Equity: 7.44% Cost of Debt:6.10% • Margins projected to decrease from 2004/2006 levels

  17. DCF • Selling, General and Administrative expenses are forecast to increase from 18% to 20% of sales due to increased requirements of management for maintaining company infrastructure • Discounted Cash Flow valuation yields a range of value from $81 – $99 • DuPont Analysis reveals coherent assumptions and slowly decreasing margins

  18. Sensitivity Analysis on WACC and Terminal Growth Rate A range from $70.51 to $103.81

  19. Competitors • Who? • American Ecology Corp (ECOL) • Microtek Medical Holdings Inc. (MTMD) • Waste Management, Inc (WMI) • Waste Management Industry • Why? • Industry specific • Strong/Solid performers • Multiples in line with Industry

  20. Critical Multiples Comparison • Gross Margin • Operating Margins • Enterprise Value/Revenue • Enterprise Value/EBITDA • EPS

  21. Performance Vs. Competitors

  22. Stericycle Comparable Companies Valuation • P/E: $50.19 • Enterprise Value/EBITDA $42.00 • Enterprise Value/Revenue $30.64 • Comps Valuation Price $40.94

  23. Portfolio Analysis • Small Correlation with Market • Good Diversification with Portfolio

  24. Valuation Discussion: Hold • The low estimate of the discounted cash flow valuation represents the current market price of SRCL • $81 is also the year-high for the stock • Comparable company valuation places a much lower value on the stock • SRCL is trading at a large premium compared to its peers • SRCL outperforms all of its peers in operating metrics such as gross margin and operating margin • DCF analysis and forecasting provide reasoning and reinforce the market’s premium for SRCL • Analyst Team recommends holding SRCL

  25. Questions? • Love to Entertain!!!

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