ClaudineVM
Elevator Pitch
I have a Buy investment rating for Stericycle, Inc. (NASDAQ:SRCL) shares.
Earlier, I wrote about Stericycle’s growth outlook for the long run and its inorganic growth potential in my previous write-up published on November 15, 2023. For the current update, the focus is SRCL’s latest quarterly financial performance and the company’s guidance for the new fiscal year.
My bullish opinion of SRCL is reinforced by the company’s positive bottom line surprise for Q4 2023 and its better-than-expected 2024 guidance. There is room for a further expansion of Stericycle’s EV/EBITDA multiple, as the company gets closer to achieving its FY 2023-2027 EBITDA growth target with its cost control and profitability improvement initiatives. I have made the decision to maintain a Buy rating for Stericycle in consideration of the above-mentioned factors.
The Market Reacted Favorably To SRCL’s Positive Earnings Surprise
Stericycle’s stock price rose by +9.9% on February 28, 2024 following the release of the company’s Q4 2023 results on the same day before trading hours.
As disclosed in its most recent quarterly earnings press release, SRCL’s normalized earnings per share expanded by +26% QoQ from $0.43 for Q3 2023 to $0.54 in Q4 2023. This implied that the company had achieved a significant +14% EPS beat for the latest quarter, considering the consensus bottom line projection of $0.47 per share.
SRCL’s actual Q4 2023 revenue of $652.0 million was just -0.7% lower than the consensus revenue estimate of $656.7 million, so it is reasonable to claim that the company’s fourth quarter top line performance was largely consistent with the market’s expectations. Therefore, it is better-than-expected profitability, instead of a positive revenue surprise, that was the factor contributing to Stericycle’s bottom line beat for the fourth quarter of 2023.
Specifically, Stericycle’s normalized EBITDA margin improved by +2.2 percentage points from 14.7% in the third quarter of 2023 to 16.9% for the final quarter of the prior year. In its Q4 2023 earnings press release, SRCL explained that “cost savings from productivity initiatives” drove the expansion in its operating margin for Q4 2023.
In the next section, I touch on SRCL’s outlook for the current year as indicated with its management guidance.
Stericycle’s Fiscal 2024 Guidance Exceeded Expectations
SRCL’s FY 2024 bottom line and free cash flow guidance were better than what the Wall Street analysts had anticipated.
Stericycle sees itself registering a normalized EPS and free cash flow of $2.35 and $237.5 million, respectively this year as per the mid-point of its financial guidance. As a comparison, the prior sell side analysts’ consensus FY 2024 bottom line and free cash flow forecasts were relatively lower at $2.22 and $214 million, respectively as per S&P Capital IQ data. The company’s FY 2024 management also points to expectations of a +24% growth in earnings and +112% expansion in free cash flow for the current year.
The major driver of SRCL’s above-expectations bottom line guidance is continued expense optimization and profitability enhancement efforts.
In its Q4 2023 earnings presentation slides, Stericycle revealed that it aimed to realize expense savings between $40 million and $45 million from “workforce management actions” this year. SRCL also emphasized at its recent quarterly earnings briefing that there are opportunities for “margin improvement” and greater “efficiencies” going forward thanks to the “over 20 infrastructure upgrades” that it did in 2023 to “modernize our infrastructure.”
SRCL’s normalized EPS guidance for the current year indicates that the company’s normalized net profit margin is projected to improve from 6.6% in FY 2023 to 8.0% for FY 2024. In a nutshell, Stericycle’s cost management initiatives have helped the company to report above-expectations Q4 2023 earnings and FY 2024 bottom line guidance.
Company Is Moving Closer To Delivering On Its Long-Term Financial Goals
The company highlighted in its fourth quarter earnings presentation slides that its FY 2024 normalized EPS guidance translates into a “14% Adjusted EBITDA growth rate” this year. In my earlier mid-November 2023 article, I mentioned that “SRCL is targeting to deliver an impressive +13%-17% EBITDA expansion on an annual basis for the FY 2023-2027 time frame.”
It is relevant to mention that Stericycle stressed at its latest quarterly results briefing that the company’s fiscal 2024 guide “does not include the opportunity for tuck-in acquisitions.” In other words, there is potential upside relating to SRCL’s actual financial performance for FY 2024 and beyond, assuming that it executes on accretive M&A deals, and does a better than expected job at managing costs (as detailed in the preceding sections).
As such, I take the view that Stericycle is getting nearer to achieving its long-term EBITDA growth target based on a comparison of its FY 2024 guidance and its FY 2023-2027 financial goals. SRCL’s above-expectations EBITDA guidance and its latest quarterly earnings beat give me confidence that the company can achieve the high end of its EBITDA growth target or close to +17% in specific terms.
SRCL is now valued by the market at a forward FY 2024 EV/EBITDA multiple of roughly 14 times based on its current year EBITDA guidance of $478.8 million (as implied by expectations of a +14% growth) and its enterprise value of $6.78 billion. My view is that Stericycle’s EV/EBITDA valuation metric can re-rate from the current mid-teens level to the high-teens range in future that is aligned with the upper end of SRCL’s long term EBITDA CAGR target at +17%.
Concluding Thoughts
I don’t see any reasons to change my existing Buy rating for Stericycle. SRCL’s recent quarterly results and current year guidance have surpassed the sell side’s expectations. As the company continues to expand its profit margins and grow its EBITDA going forward, there is a high likelihood of a favorable valuation re-rating for the stock in time to come.
