The bulk of Stericycle Inc.'s (NASDAQ:SRCL) sales come from disposing medical waste such as used needles and pharmaceutical waste. Based on the company's third-quarter results, business is booming.
Stericycle's revenue grew 24.9% from a year ago, to $667.9 million in the third quarter, which was roughly $6.5 million better than analyst forecasts. That led to Stericycle delivering EPS of $1.08 that was $0.02 better than analyst estimates, and 12.4% higher than last year. Stericycle's year-over-year sales growth accelerated from the 21.7% growth the company reported in the second quarter. Let's take a closer look.
By the numbers
In the third quarter, rising patient volume, regulatory compliance, and hospital infections contributed to solid growth, but acquisitions had a much bigger impact on Stericycle's results. Bolt-on acquisitions, including its purchase of PSC Environmental, accounted for $93.8 million of the company's $133.3 million in year-over-year sales growth.
During the first nine months of 2014, Stericycle's revenue grew by $303 million, to $1.88 billion. While Stericycle generates most of its revenue in the U.S., the company has a growing international business, too.
In the second quarter alone, Stericycle acquired 13 international companies that, combined, generate annualized sales of about $39 million. Those acquisitions helped Stericycle's ex-U.S. sales grow 26.1%, to $197.2 million in the third quarter, bringing the company's overseas sales to $561.6 million through the first nine months.
While acquisitions are driving Stericycle's sales higher, their integration costs are weighing down the company's profit margin. Stericycle reported that acquisitions reduced second-quarter gross profit margin by 2%. Because gross margin dropped from 45.2% a year ago to 41.7% in the third quarter, acquisitions remain a headwind.
Despite margin falling in the past year, Stericycle has broadly enjoyed significant long-term margin expansion thanks, in part, to increasing its exposure to small accounts, such as doctor's offices. Small accounts are far more likely to outsource disposal, which means that Stericycle has more pricing power and earns a higher margin on them. Since 1996, the percentage of Stericycle's sales that has come from small accounts has grown from 33% to 62%, resulting in almost a doubling of the company's gross margin over that span of time.
Stericycle expects that its current drop-off in margin will stabilize as acquisitions, including PSC, are eventually leveraged for lower administrative costs. Regardless, with EPS still climbing by double-digit percentages, Stericycle is still generating plenty of dry powder to fuel future M&A, and continues buying back its shares.
Stericycle estimates that its total global addressable market is worth more than $15.5 billion annually. Because Stericycle estimates its market share is about 16%, there's plenty of opportunity to keep growing.
Stericycle plans to keep pursuing margin-friendly small accounts and bolt-on acquisitions, but it also plans to increase its focus on sharps disposal, drugmaker waste disposal, and returns and recalls. Since 95% of its sales come under long-term contracts, which feature pass-through price increases, a growing client list suggests its future revenue stream will remain insulated from the economy's inevitable swings.