Stericycle Earnings: Lower Paper Prices a Near-Term Headwind but Turnaround to Accelerate in 2024
Putting aside lower recycled sorted office paper prices and surcharges compared with the year-ago quarter and revenue lost with divestitures, we thought Stericycle SRCL reported solid third-quarter results. The company’s competitively advantaged regulated waste and compliance services segment (67% of sales) reported 4% organic revenue growth, primarily driven by pricing actions. And while the secure information destruction services business saw a 12% decline in organic revenue, that decline was almost entirely due to lower paper prices and fuel and environmental surcharges. Nevertheless, Stericycle is better protected from paper price volatility now than in the past due to contract adjustments implemented by the current management team.
Adjusted EBITDA margin fell 250 basis points year over year to 14.8%, but again, lower paper prices were an outsize contributor to the margin decline. Based on our math, Stericycle’s adjusted EBITDA margin would’ve been in line with the prior year (at 17.3%), holding paper prices constant. In our view, SOP prices are normalizing from unusually high levels reached in mid-2022, and we expect related revenue and margin headwinds will abate for Stericycle during the second half of 2024.
More importantly, Stericycle successfully launched its new enterprise resource planning platform across its U.S. RWCS business. Approximately 80% of Stericycle’s business is on the new platform, and management expects to complete the international roll out by 2025. With less headcount needed to manage manual processes, management announced a workforce reduction plan that will save the company $8 million in annualized costs. We think there’s further opportunity to optimize labor costs, which should support margin expansion next year.
We’ve reduced our fair value estimate 2% to $59 per share due to our tempered near-term growth and profit margin expectations, but our long-term view is intact, and we continue to think the stock is undervalued.
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