Stericycle: Top play on medical waste

Biohazardous medical waste service is a recession-proof industry. Stericycle (SRCL), the nation's largest provider of these services, breezed through the recent economic downturn, increasing sales and earnings every year.

Investors should take the opportunity to buy the stock while it's still cheap; I don't expect that to be the case for long.

Hospitals, dentists and doctors' offices cannot simply toss used surgical supplies in the dumpster or flush expired drugs down the drain.

Medical waste is often biologically contaminated and potentially infectious. It typically includes things like used hypodermic needles, tissue samples and bandages.

Stericycle uses sophisticated steam equipment to kill contaminants. A patented, low-frequency radio wave system further neutralizes dangers. Treated waste then goes into either company-owned incinerators or is hauled to special landfills.
This is a highly regulated industry. There's a confusing grid of state, local and federal rules for the disposal of medical waste and no indication that the growing list of restrictive standards will slow down.

This has caused many hospitals and medical practices - already burdened with a mountain of government healthcare and insurance regulations - to throw up their hands and outsource their medical trash disposal to Stericycle.

High barriers to entry also deter potential competition. That keeps operating margins high.

True, recent earnings have been nothing to write home about. In the September quarter, net income rose 4.5% on a 16% increase in revenue.

But the future remains bright. Stericycle is a master at buying and integrating other companies. Last quarter it completed 17 acquisitions.

In fact, Stericycle has made more than 200 acquisit! ions ove r the last 18 years. The company now has over 485,000 clients. And it may have more than a million in just a few years.

Stericycle is expanding rapidly overseas, too. It already operates in Canada, Britain, Ireland, Japan, Brazil, Mexico, Argentina, Chile, Romania and Portugal. (Six of its 11 buys in the third quarter were international.)

Demographics also favor its business. As people age, they tend to see doctors more frequently. With the baby boomers moving into their sunset years, medical waste - and profits - will only rise.

The company turned its first profit in 1997 and has grown the bottom line every year since. Revenue at Stericycle hit $1.62 billion over the last 12 months. Operating margins are a whopping 27%.

This business is like an annuity. Doctors will keep seeing patients through good times and bad. Revenue will keep recurring.

And profits - thanks to internal growth and acquisitions - will keep climbing. You might want to board this train while it's still at the station.

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