Stericycle: The Ultimate Recession Proof Industrial Company
Posted on: December 8, 2008 - Email Article - Printable Version
One of the weakest sectors in this current market environment is most clearly the industrial sector. It is a sector that benefits from economic prosperity and booming markets to fuel growth. As rational investors know the key to eliminating unsystematic risk is diversification, and that is why it is key to still have an industrial stock in your portfolio. There is a industrial stock that benefits from one of the most stable sectors in this environment. That slowing markets and a global infrastructure slowdown can’t hold this company back from prospering. I’m talking about Stericycle [SRCL: 66.25, -0.31 (-0.47%)]: a healthcare company hidden deep within the industrial sector.
Stericycle is a medical waste services company that provides bio-hazardous medical waste disposal and infection control services for medical care facilities. They serve over 400,000 customers including: hospitals, blood banks, pharmaceutical manufacturers, out-patient clinics, acute care facilities as well as many others. They also operate not only in the United States but in Canada, Mexico, Argentina, Ireland and the United Kingdom. They operate within four business segments:
- Domestic Medical Waste Management: Collection and transportation comprise this segment. Collection involves providing clients with reusable leak and puncture resistant containers for collecting hazardous bio-waste. Transportation involves collection of provided contains for proper disposal.
- Domestic Pharmaceutical Returns: Stericycle picks up or receives shipments of excess pharmaceutical drugs from retail pharmacies in the United States.
- Foreign Medical Waste Management: Stericycle has set up national waste management facilities in foreign countries where they take the bio-waste and dispose of it.
- Foreign Equipment and Technical Licensing: This segment is in charge of training and licensing in accordance with foreign government regulations.
Market Stability
Regardless of what is going on in the economy, there will continue to be medical waste that must be disposed. It is inevitable that hospitals will continue to run, and thus bio-waste will need to be managed. Aside from the obvious, Stericycle also has a very stable contract base. They engage in fixed free arrangements, which account for nearly half of the revenue base. They also engage in lengthy contracts, with the domestic contracts averaging 3-5 years and the international contracts averaging 3-15 years with the lengthier ones being in the United Kingdom. As if that is not enough stability, Stericycle maintains a 95% revenue retention rate. So you may be wondering how oil impacts their business since they are in the transportation business. Their contracts generally include what is called pass-through-price increase provisions which is their “hedge” against high oil prices.
So based on what they do, it is evident that they operate in a stable industry. That alone makes me love them in this type of market. But, just to drive the point home, here are a few more reasons as to why Stericycle could be your ultimate hedge in your portfolio to the recession.
Strong Growth Potential
There is safe growth within a necessary product base when looking at Stericycle’s business. However, Stericycle is also beginning to penetrate into emerging markets. This is perfect because while the emerging markets are currently down, Stericycle is taking advantage of the situation and is poising themselves for immense growth potential. Stericycle also has an initiative called Steri-Safe, which provides low-cost, high quality products and services for poorly financed companies. Along with this initiative, they also maintain a diverse customer base. Their largest customer accounts for less than 2% of revenues. They have also proven themselves to be great integrators, successfully completing 140 acquisitions since 1993. Their acquisition pipeline is also expanding. Currently, European valuations are much more attractive than domestic ones, and Stericycle is looking to take advantage of this going forward. There is still potential with the way the economy is deteriorating, and domestic companies will become available at fire sale prices. This could set Stericycle up for a huge value-added event in the near future.
Favorable Medical Trends
When you operate in a highly regulated industry, there tends to be some advantages within niches of the industry. In the case of Stericycle, the main advantage is the safe demand of the industry since it is a necessity. One of the current trends that I see continuing into the future is the high demand for their services. This demand allows Stericycle to maintain strong pricing power. Now you may be wondering why other companies are not trying to penetrate into this industry. Becuase the industry is very highly regulated, it is very hard and expensive to get this type of business going. Stericycle alone is regulated by the EPA, DEA, FDA, OSHA and DOT. Thus I feel that Stericycle will be able to maintain strong volumes and the competition will stay limited.
Summary
While Industrials is a very touchy sector right now, this opportunity could be your ultimate play within the sector. They operate in a recession proof industry and they have clearly proven that they know how to grow their business. Along with that, government regulation keeps potential competitors out and allows Stericycle to maintain their pricing power. So if you are looking to position yourself as the economy continues to spiral downwards, then I highly recommend you do it through investing in Stericycle!
-Mahir Desai
Disclosure: The mutual fund that the author manages is long SRCL.
The Following Stocks Were Mentioned In This Article: SRCL
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