Presentation for RCMP 11/06/08
Brad Johnson Lucian Tira Evangelos Kalogiropoulos Gani Beket
Company History
Founded in 1989 after Medical Waste Tracking Act
First acquisition of outside provider in 1993
Launched IPO in 1996 First International operation in 1998
Company Overview
Offers collection, transportation, treatment, disposal, and recycling of medical waste
Full service for nearly 400,000 customers Small customers include doctors’ offices
and pharmacies Large customers include pharmaceutical
companies, hospitals and blood banks Foreign customers nearly 23% of
revenues
Products and Services
Regulated Medical Waste Services Handle possibly infected waste and
prevent contamination and infection Provided for both large and small
customers Service expanding greatly in
International market
Products and Services
Steri-Safe OSHA Safety & Compliance Program Training for smaller customers to
comply with regulations Manual, website support, consulting
and supplies Very high margins
Products and Services
Bio Systems Integrated Sharps Safety Solution Provides containers for used needles Collection and destruction of needles to
prevent sticks Pick them up along with other medical
waste
Products and Services
Returns Management Services Removal of expired or unsafe products
from customers For manufacturers, hospitals,
pharmacies and distributors Handle the notification, processing,
tracking and compliance reporting Also handle medical recalls
Macroeconomic Factors
Population is getting older and needing more healthcare
New president’s healthcare plan Changing Government regulations Tightening credit markets may
affect growth
Transaction History
Purchased 200 shares in May 2001 @ $19.47
Stock split 2:1 in June 2002 Sold 200 shares in March 2006 Stock split 2:1 May 2007 Currently hold 400 shares at $56.20
(11/5) with an effective cost basis of $9.73
Industry overview Estimated market size:
Global $10.0 Domestic $3.0-$3.2B“Frost & Sullivan Industry Study and Management Estimates” (including ancillary services &
products) Regulated medical waste = any medical waste
that can cause an infectious disease such as needles, syringes, gloves etc
Five federal agencies supervise regulated waste under a variety of statues
1. U.S. Environmental Protection Agency (“EPA”)2. U.S. Department of Transportation (“DOT”)3. Occupational Safety and Health Administration (“OSHA”)4. U.S. Drug Enforcement Administration (“DEA”)5. U.S. Postal Service (“USPS”) Different regulations in each state
Industry overview
Growth factors Aging of population Pressure to reduce Healthcare costs Environmental and Safety Regulation Requirements of the Occupational Safety and Health
Administration (“OSHA”) Shift to Off-Site Treatment Control of Drug Diversion The U.S. Drug Enforcement Administration (“DEA”) has
recently emphasized on proper handling of expired or recalled pharmaceuticals.
Source:''www.stericycle.com''
Company review
Market share: global 10%, domestic 22% Operate in the U.S., Canada, Mexico, the
U.K., Ireland and Argentina No direct domestic competitors Insulated from economic cycles Revenue retention rate 95% No large customer exceeds 2% of
revenues Over 95% of revenues under long term
contracts with automatic renewal
Risk Factors & Competitive Strengths
Risk Factors
Governmental Regulation
Low barriers to entry Technology and
patents Potential
environmental liabilities
Foreign exchange
Strengths
Broad range of services Established National
Network Diverse Customer Base
and Revenue Stability Ability to integrate
Acquisitions Strong sales Network
and Proprietary Database
Experienced Senior Management Team
Business Model
Collection of
regulated waste
Processing Facility
Transferstations
Recycling orpermanentdisposal
Supply specially designed reusable leak-and puncture-resistant plastic containers to large and small-quantity customersCollect them at intervals specified mainly by contract
Temporarily hold small loads of waste until they could be consolidated into truckloads and transported to a processing facility.
First they scanned for unacceptable substances and then proceed to various treatments such as Autoclaving, ETD, chemical, Incineration
Disposal in a third party landfill. Complete documentation to customers for all regulated waste collected
Current Strategies
Expand Range of Services and Products1. Regulated waste services to pharmaceutical companies
and other large-quantity generators Improve Margins1. Increase the base of small-quantity customers2. More efficient service strategies for large-quantity
customers Seek Complementary Acquisitions1. Acquire businesses that expand its national and
international networks Completed 135 acquisitions from 1993-2007, 100 domestic and
35 international
SRCL vs. S&P 500
Revenue breakdownLarge quantity generators (LQG)
-
5,000
10,000
15,000
20,000
25,00030,000
35,000
40,000
45,000
50,000
2004 2006 2008 2010 2012 2014
Period
# of
LQ
Gs
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
$ re
venu
e
Revenue perLQG
# of LQGs
• LQGs constitute around 37% of total revenues and account for 2.46%
of total number of customers
• Continued penetration of BioSystems led to increase of revenue per LQG
• Average gross margin in this segment is 21%
Revenue breakdownSmall quantity generators (SQG)
-
100,000
200,000
300,000
400,000
500,000
600,000
2004 2006 2008 2010 2012 2014
Period
# of
SQ
Gs
-
500
1,000
1,500
2,000
2,500
$ re
venu
e
# of SQGs
Revenue perSQG
• SQGs constitute around 63% of total revenues and account for
97.54% of total number of customers
• Increased adoption of SteriSafe program (including higher priced “select” and “premium” versions)
• Average gross margin in this segment is 44.3%
Past sources of growth
Organic growth vs growth due to acquistions
0%
5%
10%
15%
20%
25%
30%
35%
2002 2003 2004 2005 2006 2007
Year
% g
row
th
0
5
10
15
20
25
Num
ber
of a
cqui
stio
ns
% growth inrevenue
% growth dueto acquisitions
% growth dueto organicgrowthNumber ofacquisitions
Acquisitions have been fueling growth for years!
Acquisitions pipelineAcquisitions financing sources
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007
Year
% o
f tot
al a
cqui
sitio
n so
urce
s
Equity
Debt
Cash
Acquisitions value, mln $ 37.4 90.6 189.4 194.9 241
Acquisition deal structures increasingly favor debt…
Pro-forma P&L 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
Medical Waste (dom-ic) 495,469 557,927 637,731 727,013 799,715 879,686 958,858 1,045,155 1,139,219
yoy growth 10.5% 12.6% 14.3% 14.0% 10.0% 10.0% 9.0% 9.0% 9.0%
Medical Waste (foreign) 100,147 172,653 210,857 267,788 321,346 369,548 424,980 488,727 562,036
yoy growth 70.9% 72.4% 22.1% 27.0% 20.0% 15.0% 15.0% 15.0% 15.0%
Returns mng-nt (dom-tic) 12,778 58,509 83,677 115,474 155,890 202,657 253,322 303,986 349,584
yoy growth 1157.7% 357.9% 43.0% 38.0% 35.0% 30.0% 25.0% 20.0% 15.0%
Domestic gross margin 46.3% 47.7% 48.7% 49.7% 50.0% 51.0% 51.0% 51.0% 51.0%
Foreign gross margin 32.1% 32.4% 31.4% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%
EBT 18.4% 21.9% 20.5% 23.2% 23.9% 25.3% 25.9% 25.4% 24.5%
Source: 10K’s, team estimates
DuPont Analysis
2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
Net Income (NI) 105,271 118,379 157,112 186,362 224,130 258,864 284,872 307,046
Shareholders Equity 625,081 714,075 871,187 1,057,549 1,281,679 1,540,543 1,540,543 1,572,207
ROE 16.84% 16.58% 18.03% 17.62% 17.49% 16.80% 18.49% 19.53%
Profit margin 13.33% 12.69% 14.15% 14.59% 15.44% 15.81% 15.50% 14.97% Net profit/Sales 20.99% -4.80% 11.50% 3.14% 5.77% 2.43% -1.97% -3.41%
Asset turnover 66.48% 63.54% 65.61% 66.80% 65.19% 62.38% 62.90% 66.11% Sales/Avg. Assets 2.63% -4.42% 3.27% 1.81% -2.40% -4.32% 0.83% 5.10%
Equity multiplier 2.12 2.25 2.04 1.94 1.88 1.84 1.95 2.04 Assets/Equity 5.77% 6.01% -9.48% -5.05% -2.99% -1.76% 5.61% 4.55%
Leverage
2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
Current portion LTD 22,681 22,003 21,410 19,067 26,374 13,547 13,547 13,547
Senior credit facility 387,265 465,434 488,521 510,780 580,757 654,864 735,147 820,336
Notes payable 77,914 168,641 111,028 127,695 145,189 196,459 220,544 246,101
Total debt 487,860 656,078 620,959 657,542 752,320 864,870 969,239 1,079,983
Total assets 1,327,906 1,608,1591,776,062 2,047,186 2,406,895 2,842,085 3,001,648 3,202,624
Debt/total assets 36.74% 40.80% 34.96% 32.12% 31.26% 30.43% 32.29% 33.72%
Leverage – revised
2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
Total debt 487,860 656,078 620,959 657,542 752,320 864,870 969,239 1,079,983
Total assets 1,327,906 1,608,159 1,776,062 2,047,186 2,406,895 2,842,085 3,001,648 3,202,624
Intangibles 929,852 1,186,022 1,265,101 1,341,153 1,457,946 1,668,476 1,920,970 2,202,503
Assets less intangibles 398,054 422,137 510,961 706,033 948,949 1,173,608 1,080,678 1,000,121
Debt/Assets less intangibles 122.6% 155.4% 121.5% 93.1% 79.3% 73.7% 89.7% 108.0%
DCF inputs
Description of an input Value Source/Other comments
Weight of Debt 13.0% Based on market MV of equity BV of debt
Weight of Equity 87.0% Based on market MV of equity BV of debt
Cost Debt 6.00% Bloomberg. Yields on company’s LT debt.
Cost Equity 10.27%
β 0.78 Bloomberg, finance.yahoo.com.
R f 4.00% Yields on 10-yr US treasuries
Return on the market 12.00% Team assumptions
Tax rate 39.00% Effective income tax rate of the company
WACC 9.41%
Sustainable growth rate 4.00% LT growth rate of the US GDP
DCF model
2007 2008 2009 2010 2011 2012 2013 TV
Net Income
118,379
157,112
186,362
224,130
258,864
284,872
307,046
+Depreciation
27,480
32,097
36,659
41,882
47,800
54,466
61,939
+Amortization
3,657
5,329
6,129 6,969
7,858
8,822
9,844
-CAPEX
(40,031)
(47,089)
(54,292)
(61,771)
(69,736)
(78,402)
(87,654)
-∆NWC
18,337
(27,661)
(16,044)
(7,073)
(28,056)
(16,498)
(17,506)
FCF
127,821
119,789
158,816
204,137
216,730
253,260
273,668
5,262,078
PV - -
145,158
170,536
165,487
176,749
174,568
3,356,572
DCF results
Description Value
PV of FCF 4,189,070
Less: LT debt 635,784
Plus:Cash and ST inv 18,364
Equity value 3,571,650
# of Shares 85,406
Price per share $ 41.82
10% range $37.6-$46
Market price as at 6-Nov-08 is $58
Current stock price implies growth rate of revenues over 20% in the following 5 years!!!
Sensitivity analysis
TV growth rate
WACC
3% 3.50% 4% 4.50% 5%
7.0% $ 62.04 $ 70.77 $ 82.42 $ 98.71 $ 123.16
8.0% $ 47.84 $ 53.08 $ 59.62 $ 68.03 $ 79.24
9.41% $ 35.36 $ 38.31 $ 41.81 $ 46.02 $ 51.18
10.0% $ 31.63 $ 34.04 $ 36.85 $ 40.16 $ 44.14
10.5% $ 28.94 $ 30.98 $ 33.35 $ 36.10 $ 39.36
1 yr stock performance
“Flight to quality” since October as investors dump other stocks?
Recommendation
SELL 200 shares of Stericycle (SRCL) at the market price of $55.00: Tight credit markets hinder growth at previous rates “Flight to quality” baked into the current price High profit margins and low barriers to entry may lure
in competition