Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Stericycle (SRCL +0.00%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Stericycle's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Stericycle's key statistics:
SRCL Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth >30% |
56.4% |
Pass |
|
Improving profit margin |
(4.2%) |
Fail |
|
Free cash flow growth >Net income growth |
31.3% vs. 49.8% |
Fail |
|
Improving EPS |
47.6% |
Pass |
|
Stock growth (+ 15%) <EPS growth |
77.6% vs. 47.6% |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
SRCL Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(17.4%) |
Fail |
|
Declining debt to equity |
(19.4%) |
Pass |
Source: YCharts. * Period begins at end of Q2 2010.
How we got here and where we're going
Stericycle doesn't come through with the results we'd like, as it earned three out of seven possible passing grades. Stericycle's net income might have outpaced its free cash flow during our tracked period, but the raw numbers show that the company's free cash flow has been consistently higher than its net income over the past few years. The company could also pick up another pass if it can find greater balance between share-price growth and EPS growth going forward. Let's dig a little deeper to find out what Stericycle is doing to improve.
Stericycle posted a 12% year-over-year gain in revenue in its latest quarter, and management stated that the recent acquisition of Healthcare Waste Solutions added $34 million in revenues, or about 6% of the total. However, some veterinary hospitals have accused Stericycle of charging higher-than-standard costs for its services. The company leverages its strong network in medical waste management, which makes it difficult for other companies to make inroads. On the other hand, it can also result in a bit of antitrust fear if enough of Stericycle's customers start yelling about being ripped off.
Stericycle expects continued growth in the waste-disposal industry, due to rigorous compliance standards imposed by the government regarding medical waste treatment. The company might drive significant revenue growth from an increasing number of private hospitals that generate a large quantity of medical waste. The global specialized-waste management industry is worth $15 billion, and Stericycle already controls 13%. It's not into monopoly territory just yet, but it's an impressive showing. The company will keep expanding its presence through an acquisition-driven strategy, which is sure to increase its degree of control over the medical-waste industry.
Rivals, including Waste Management (WM 1.48%) and Republic Services, are also implementing new plans compete with Stericycle in the US markets. Waste Management recently acquired Greenstar, which can process 1.5 million tons of recycled material each year. On the other hand, Republic continues to focus on small and mid-size markets. Waste Management also owns three medical waste processing facilities, but this is only a small slice of its highly diversified waste business.
Putting the pieces together
Today, Stericycle has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
