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Elevator Pitch
I have a Buy investment rating assigned to Stericycle, Inc.’s (NASDAQ:SRCL) shares now.
I made the assessment that “SRCL’s revenue outlook is murky” in my prior update for the company written on August 30, 2022. Stericycle has proven me wrong with its above-expectations financial results for the third quarter of this year. Considering Stericycle’s Q3 2022 earnings beat and its improved top line guidance, I have turned positive on SRCL and thinks that it deserves to be upgraded to a Buy rating.
Q3 2022 Headline Numbers
Stericycle disclosed its recent Q3 financial performance last week on November 3, 2022 before trading hours.
Investors had a positive view of SRCL’s third quarter results as evidenced by the stock’s post-earnings announcement share price performance. Stericycle’s stock price jumped by +7% from $42.44 as of November 2, 2022 to $45.24 as of November 3, 2022. SRCL’s shares continued to go up in the next couple of trading days, and closed at $48.20 as of November 9, 2022. In other words, the company’s Q3 2022 financial results release drove a +14% increase in Stericycle’s share price in the past week.
Specifically, Stericycle’s top line expanded by +6.4% YoY from $648.9 million in Q3 2021 to $690.3 million for Q3 2022. This was superior to SRCL’s +2.0% YoY revenue growth for Q3 2021 and +1.1% sales increase for Q2 2022. Moreover, SRCL’s revenue surpassed the Wall Street analysts’ consensus projection of $675.2 million by +2%.
SRCL also reported a non-GAAP adjusted earnings per share or EPS of $0.65 for the third quarter of the current year. This was equivalent to a +48% YoY growth and +35% QoQ increase in Stericycle’s bottom line for the most recent quarter. In addition, Stericycle’s Q3 2022 normalized EPS was +12% better than the sell-side’s consensus estimate of $0.58.
A +12% earnings beat for the third quarter certainly justified Stericycle’s +14% stock price increase in the last one week.
Pricing
Stericycle’s secure information destruction business segment and regulated waste and compliance services business segment both benefited from favorable pricing moves.
At its Q3 2022 investor call, SRCL revealed that the company’s secure information destruction segment saw a +27.3% YoY jump in services revenue in the recent quarter, which was largely driven by higher prices. Assuming there was no increase in prices, the secure information destruction business’ service revenue would have just expanded marginally by +2.3% alone based on volume growth.
On the other hand, the company’s regulated waste and compliance services business was able to achieve positive organic revenue growth (+2.2% YoY) for Q3 2022, despite the fact that demand for regulated waste services has eased significantly as compared to the pandemic period. The top line increase for SRCL’s regulated waste and compliance services segment is largely attributable to “pricing levers including fuel surcharges and the service cost recovery fee” as per management’s comments at the most recent quarterly earnings call.
Operating Efficiency
Apart from favorable pricing, an improvement in Stericycle’s operating efficiency was also another important reason for SRCL’s above-expectations bottom line.
The non-GAAP adjusted EBITDA margin for SRCL widened by +1.9 percentage points from 15.4% for the third quarter of 2021 to 17.3% in the most recent quarter.
One good example of Stericycle’s efforts in becoming more efficient is that its secure information destruction business’ new facility in Stockton has witnessed a +4% increase for the “stops per day” metric after being in operation for more than a year.
SRCL also mentioned at its Q3 2022 earnings briefing that it “opened four new greenfield autoclave facilities” and “completed 22 upgrade projects” in the last 2 years as part of its operating efficiency improvement initiatives. This certainly helps to explain why Stericycle has been able to expand its operating profit margin in the current challenging operating environment, which has seen many companies’ profit margins being depressed by inflationary cost pressures.
Management Guidance
Stericycle’s management guidance disclosed in tandem with its Q3 2022 earnings announcement is encouraging.
The company is leaving its bottom line and free cash flow guidance unchanged notwithstanding the current weak economic conditions. SRCL still expects to generate a normalized EPS of $2.075 and free cash flow of $90 million for full-year fiscal 2022 based on the mid-point of its guidance. More importantly, Stericycle lifted its FY 2022 organic revenue growth outlook from +4%-6% to +5%-7%.
In my opinion, SRCL is in a good position to meet the company’s higher top line guidance and unchanged bottom line guidance for the current year.
Stericycle highlighted at its most recent quarterly results briefing that it has “put in underlying core pricing actions” which should “see some momentum” going forward. Separately, SRCL also indicated at its recent Q3 investor briefing that it is the midst of executing on a “broader Regulated Waste and Compliance Services, North America ERP (Enterprise Resource Planning) rollout.”
I take the view that favorable pricing moves and the ERP implementation should be positive for SRCL’s near-term revenue growth and profitability improvement, respectively.
Concluding Thoughts
I think that Stericycle warrants a Buy rating now. I currently have a bullish view of the company’s shares, taking into account SRCL’s recent above-expectations quarterly guidance and reasonably good updated management guidance.
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