RBC On Stericycle: 'Three Strikes And You're Out,' Downgrades To Underperform

Stericycle Inc SRCL reported a significant earnings miss for the third time in the past five quarters, while meaningfully reducing its guidance.

RBC Capital’s Gary Bisbee downgraded the rating on the company from Sector Perform to Underperform, while lowering the price target from $119 to $96.

Strike Three

Following the string of weak results, Bisbee believes the risk-reward on the stock is unfavorable.

The analyst questioned management’s capabilities, and mentioned the results proved the business was “no longer the predictable, premium grower it has been in the past.”

Bisbee explained that the poor results were driven by further deterioration in Stericycle’s “hazardous waste unit, cost pressures at international operations, and a delay in achieving cost savings at Shred-it.”

The analyst also stated the only factor that had so far kept him from being negative on the stock was expectations of growth acceleration in 2017, as the merger synergies for Shred-it kick in and Stericycle laps the recent challenges associated with hazardous waste.

However, “there is little in the near term to keep us from a more negative view,” Bisbee said.

Mix Shift Risks

According to the RBC Capital report, “With its core US medical waste unit slowing, SRCL has diversified in recent years into a number of less profitable and in some cases more volatile businesses to continue growing.”

However, with the company becoming increasingly dependent on these units to spur growth, Bisbee believes that there could be risk of persisting margin pressure and declining ROIC.