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Published: March 3, 2010
As a self-confirmed needle-phobe, I try not
to glance at those opaque bins in the doctor's office that are
full of used syringes and other such instruments. But looking in
the other direction doesn't change the fact that healthcare
facilities go through a mountain of "sharps" every single day.
The image isn't terribly appealing, but the rational investor in
me knows that there is an opportunity lurking here.
The healthcare business is immune to an ill economy, people need
vaccinations, sutures and blood screens regardless of business
cycles. Medical waste disposal isn't quite as simple as hauling
away household garbage or yard clippings -- this business falls
under the watchful eyes of the Environmental Protection Agency
(EPA), the Department of Labor, Occupational Safety & Health
Administration (OSHA) and several other regulatory bodies.
In short, that means two things: Demand is constant and barriers
to entry are high.
Stericycle (Nasdaq: SRCL) is the dominant player in this
field. The firm safely empties all those bins, and also removes
discarded waste from research facilities, laboratories,
hospitals, surgical centers, pharmacies, veterinary clinics and
even dentists' offices. Add them up, and the company has won the
business of more than 430,000 customers around the world.
We're not just talking needles either. As
fate would have it, my wife happens to work for a major regional
blood bank, and she informs me that Stericycle comes like
clockwork to pick up used test tubes and all types of
contaminated materials.
Logistically, it takes a large footprint to generate a fair
return in this business -- servicing remote facilities far off
established routes just isn't profitable. Stericycle's network
is second to none, which is why the firm's operating margins of
27% are three times the industry average.
Stericycle's safety record and environmentally-friendly waste
treatment system speak for themselves. So customers don't
hesitate to sign up for 3-5 year contracts that renew
automatically -- which keeps retention rates consistently above
95% -- because any mishaps can be met with stern fees and even
loss of license.
With the firm adding new customers and keeping old ones, revenue
has soared from $67 million to $1.1 billion during the past
decade. Meanwhile, profits have doubled every 2.2 years on
average and jumped +28% last year despite the recession.
Remarkably, the firm has either met or exceeded earnings
expectations every single quarter since its
IPO in 1996.
But this growth story is still unfolding.
Ten years ago, large accounts represented two-thirds of
Stericycle's sales, and small customers just one-third. Those
percentages have now flip-flopped. It's nothing but a good thing
for the company as smaller clients have growth potential of
their own, which means more waste going forward. They also have
less power at the bargaining table, so prices for Stericycle's
services tend to be higher.
And there are still plenty of potential customers that haven't
yet been reached. It may be the industry's biggest player, but
Stericycle only controls 11% of this fragmented $10 billion
market.
There will always be biohazardous materials that need to be
safely collected and disposed of, and heavy regulatory oversight
discourages new competitors from joining this race. Even if they
did, any future rivals will be hard-pressed to duplicate
Stericycle's vast network, low prices, and patent-protected
waste treatment process.
-- Nathan Slaughter
Editor
StreetAuthority Market Advisor
The ETF Authority
P.S. -- Of the waste removal industry, people often say
that "trash is cash." Perhaps that's why the two wealthiest men
in the world appear to be cornering this vital industry. You
see, combined, Warren Buffett and Bill Gates recently poured
more than $1.5 billion into two dominant "waste" stocks. Do you
know which ones? Surely after this hint you can beat 9 out of 10
of our investor trivia respondents.
Take a shot here and get the names of these two Buffett/Gates
stocks. |
