Updates: Glaukos (GKOS), Ferrari (RACE). Syericycle: Interesting combo of medical waste disposal and information destruction

Updates on recommendations Glaukos (GKOS) +42% and Ferrari (RACE) +62%:   Based on a 42% capital gain in 4 months Jan 1017 to April 2017 for GKOS and the high-risk nature of the single-product ophthalmic medical firm, I took profits and moved on. My concern is the high valuations with little in the form of cash earnings on the horizon.  In addition, there will be plenty of competitive products from both hard devises like the iStent and less invasive eye drops.   

Ferrari has done a bit better with a 62% gain in 7 months and is also trading at elevated valuations compared with other ultra-luxury brands.  Profits were taken as well and the positon was reduced by half.   If share valuations return to those experienced over 6 months ago, I would again be a buyer of RACE.   If not, I am happy with retaining a half position and the cash profits.     

Stericycle (SRCL) offers an interesting combination of medical waste disposal and “information destruction” services.  SRCL has historically been focused on surgical and medical waste disposal of items such as needles, sharps, gloves and gowns, mainly generated at large hospitals with active surgical centers.  As a service provider to cost-constrained facilities, SRCL grew by acquisition and consolidation in their market.

There used to be 2,000 medical incinerators in the US.  Due to more stringent regulations and a growing preference to sterilize and reuse (autoclave process) than disposal, the number of medical waste disposal incinerators has shrunk to under 50.  There are only 15 sites that accept outside generated waste, and SRCL operates 10 of these facilities. In addition, SRCL operates 200 transfer stations to efficiently move waste through its disposal network.    

The company maintains relationships with over 500,000 customers with an annual retention rate exceeding 92%.  The company believes it has a 10% global, and 30% of US, market shares in the fragmented industry of medical waste management.  

In 2015, SRCL moved past its medical focus and into document shredding and disposal, interesting known as “information destruction”.  Management bought market leader Shred-it, adding mobile units, an established customer base and routes, and shredding equipment.      

The addition of document management adds to the plate of services offered to existing clients.  Management believes shredding adds a minimum revenue potential of 5% and 6% per hospital client and 7% to 10% for physicians’ offices.   

US Domestic Regulated Waste and Compliance Services generated $2.4 billion in 2016 revenue and constituted 66% of total receipts.  Communication Services was $300 million in revenue, 8% of the total, and International was $900 million or 26%.

Under Communications Services, SRCL offers comprehensive solutions to patient communication issues for hospitals and doctor offices.  These include, from their website: 
•    Live customer service during the day or after business hours to provide superior service, capture additional revenue and enhance customer/patient satisfaction.
•    Book appointments online in a self-serve manner or through trained agents over the phone at time that is most convenient for customers or patients. 
•    Reduce no-show rates and missed appointments with appointment reminder notifications via call, email or text.
As costs are being squeezed across the spectrum of medical expenses, SRCL strength is its relative size and diversity of product offerings.  For example, in 2016, management generated $411 million in free cash flow.   Debt is being reduced by 8% to 9% annually, and should be below $2.6 billion by the end of this year.  

However, investors have been burned recently based on stumbles with integrating Shred-It.  Share priced peaked in 2015 in the $140s, and have fallen about 50% since. 

Management is calling for flat earnings comparison 2016 to 2017.  According to the latest investor presentation, 2016 EPS of $4.75 should be adjusted as follows:
Price Concessions          -$0.25 to -$0.30
Corporate Expenses         -$0.17 to -$0.21
Revenue Growth        +$0.17 to $0.21
Merger Synergies        +$0.13 to $0.15
Share Repurchase         +$0.05 to $0.07

Net result is 2017 EPS in the $4.60 to $4.75 range.  Of concern is the high relative price concessions already identified as a hurdle.  

Investors looking for exposure to the medical sector should review Stericycle.  Their niche businesses and extensive cross selling opportunities should allow management to get back on the growth track after stumbles caused by customer consolidation, claims of inappropriate price increases, and auditor concerns with financial controls.  These issues appear to be already priced into stock valuations, and a return to its historic growth projections would reward long-term investors.     

Consensus EPS growth is expected to be in the 8% to 10% range and SRCL does not currently pay a dividend. Price targets vary from $95 to $100 range, offering a 9% to 10% total annual return over the next 2 years.   

This article first appeared in the May 2017 issue of Guiding Mast Investments.  Thanks for reading, George Fisher