We Fools like to invest in businesses that have a competitive advantage, which I define as a unique position plus the right supporting capabilities. I think Stericycle (NASDAQ:SRCL), a leading provider of medical waste management services, is one of those businesses.

Being an entrenched niche player in a highly regulated environment is a good position. The company has to have all of the right permits and know the rules backwards and forwards. If not, it doesn't get paid and could lose its privileges. Fortunately, Stericycle has the right supporting capabilities (people, equipment, and plants) to help healthcare facilities dispose of medical waste properly, and make money along the way.

Stericycle serves over 300,000 customers, including 87,000 with its Steri-safe program and 154 customers with its Biosystems program. Using these programs, Stericycle charges monthly fee depending on the level of service they purchase. For the highest levels of service, Stericycle takes on the customers' compliance risk. Think of it as a long-term service agreement (or an insurance policy), similar to the way GE (NYSE:GE) Aircraft Engines sells an aircraft engine with a service agreement that guarantees certain performance levels for the aircraft. Basically, the better the engine performs, the more money GE makes. The same goes for Stericycle.

From its first-quarter earnings report, released yesterday, we can see that Stericycle continues to serve its customers well and is making money in a very non-glamorous industry. Relative to the last year's first quarter, sales grew 20% while net income only grew 14% due to some contractions in gross margins. In addition, Stericycle also took in about $29 million of free cash flow, a 37% increase from 2004.

That's all good news, but there are things to worry about, too. Waste Management (NYSE:WMI), a significantly larger competitor, recently decided to get back into medical waste management. Because it already performs regular waste-removal services for over 1,800 large hospitals, it can bundle the services together. That's good for Waste Management, bad for Stericycle.

Although Stericycle continues to perform (the stock was up almost 5.33% midday), the stock is off its 52-week high. Taping together a free cash flow to the firm (versus just the equity holders) by adding interest expense to the familiar formula (operating cash flow minus capital expenditures), we get $30.8 million for the quarter. The company's business isn't really cyclical, so if we conservatively project that same figure for each of the remaining quarters, we get a projected yearly FCF figure of $123.2 million, which gives us a forward EV/FCF ratio just under 18. I would consider it fairly valued near today's price -- not a screaming buy for a value guy like me.

Fool contributor David Meier owns shares of GE. He does not own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy.