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Stericycle dropped to sell by Baird

May 5, 2017

Baird’s David Manthey downgraded shares of Stericycle Inc SRCL 1.48%, the largest provider of regulated medical waste management, from Neutral to Underperform with a price target lowered from $74 to $73.

According to Manthey, the company has developed an unfavorable reputation of consistently “adjusting out” various line items each quarter. Most notable is Stericycle’s exclusion of its acquisition and integration expenses ($19.8 million in the first quarter on top of $97.2 million for all of 2016). In addition, the exclusion of litigation and professional services expenses is “questionable,” and its convertible preferred buyback gains have “finite life.”

Earnings, Lawsuit Concerns

Manthey argued secular concerns poses risks to the company’s 2017 gross margin guidance. The problem is the company’s guidance implies an “unprecedented ramp,” and if any gains fall short of expectations, then future earnings reports will prove to be “disappointments.”

The analyst also highlighted an ongoing customer lawsuit which could pose damages in excess of $600 million. Granted, this remains a “binary risk” and difficult to estimate, the fact is the odds of any adverse settlement and verdict is greater than zero.

Finally, the analyst noted his price target is derived from a sum of the parts analysis as historical valuation trends have “little relevance.” Specifically, the $73 price target assumes a 13x EBITDA multiple on the domestic SQ business and multiples of 7.5x-9.0x on the remaining businesses.

Bottom line, Manthey sees Stericycle’s stock experiencing a “slow bleed lower” as investor sentiment will “re-calibrate to reflect the new realities.”


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