In an attempt to improve my ability to understand companies (and hopefully their quality), I wrote an mini equity research report.
I was wondering if anyone could give me tips on how to make an investment thesis for an ER report? And maybe some advice on how to do better in general?
Help/tips/suggestions would be appreciated. Thanks!
Stericycle, Inc. provides business and consulting services. Its services include medical waste disposal, Steri Safe medical waste and compliance program, clinical services program, bio systems reusable sharps disposal management services, pharmaceutical waste disposal and hazardous waste disposal. The company operates through two geographical operating segments: United States and International. The company was founded in March 1989 and is headquartered in Lake Forest, IL.
Performance/ 1Q Results
Reported a solid 1Q: Revenues were at $460.1M, creating 15.6% year-over-year growth. Cost of goods sold (COGS) grew 18.1% to $254.8M, up from $215.7M during the comparable period last year. Gross profit represented 44.6% of revenue compared to a gross margin of 45.8% last year. Operating income was $116.3M, up $13.9M, or 13.5%, from $102.4M during 1Q last year. The Company grew net income to $64.9M, or $0.75 per diluted share, compared to a profit of $55.7M, or $0.64 per diluted share, in the first quarter last year. Non-GAAP earnings per share, adjusted for acquisitions and non-recurring expenses, were $0.78 per diluted share. Capital expenditures (CapEx) for the period were $17.0M. As do most other firms in the waste management industry, Stericyle has exposure to unfavorable fluctuations in commodity pricing for gas and diesel, which is used for their trucks, and for the purchase of containers and boxes.
Revenues grew 15.6% to $460.1M. This increase was primarily driven by revenue from acquisitions, which contributed $41.0M to sales. Domestic regulated waste and returns management acquisitions contributed to $18.1M of that revenue, while international acquisitions, net of divestitures, supplied $22.9M of revenues. Domestic revenues increased 13.3% to $329.2M from $290.6M in the prior year quarter. International revenues grew 21.7% to $130.9M compared to $107.5M last year. The effect of exchange rate fluctuations unfavorably impacted revenues by $3.3M.
The increase in domestic COGS resulted from costs related to revenues from acquisitions and internal growth, and from an overall increase in fuel and energy costs. The increase in international COGS was driven by the impact of exchange rates, revenue growth, and integration of acquisitions.
Gross profit rose to $205.3M, up 12.5% from the prior year quarter. Gross margin compressed to 44.6% from 45.8% in the first quarter of 2011. Company-wide gross margin percentage decreased primarily due to the low-margin revenues of newly acquired companies, which were partially offset by improving margins in the base business
Sales, general and administrative (SG&A) experienced a 12.9% increase from $75.3M in the first quarter last to $84.9M this quarter. On the international front, SG&A increased 28.7% to $24.2M or 18.5% of sales from $18.8M or 17.4% of sales last quarter, which was driven by an increase in international acquisitions. This was partially offset by restructuring of the international management framework and by continued integration of acquisitions. On the domestic front, SG&A expenses increased 7.4% from $56.5M or 19.4% of revenue to $60.7M or 18.4% of sales. This was affected by an increase in amortization expenses of acquired intangible assets as a percentage of revenue of 10 basis points.
Operating income was $116.3M, a 13.5% increase over $102.4M from the prior year quarter. This was effected by acquisition expenses, integration expenses, expenses related to a change in the fair value of contingent consideration, and restructuring and and plant closure costs.
Net working capital grew $29.6M or 46.5% to $93.3M from $63.7M. Current assets increased by $36.5M. Acquired current assets contributed $7.8M, foreign currency translation contributed to $75.4M, increase in accounts receivable due to incremental revenues contributed $14.5M, and increase in cash contributed $6.7M. Current liabilities increased by $6.9M.
Net interest expense increased to $12.7M, up from $11.2M last year. This increase arose from a higher rate of revolver borrowings and higher debt levels in general.
Income tax expense increased to $12.7M over an expense of $11.2M last year. The effective tax rate decreased to 36.6%, down from 37.8% in 2011. This reduction in consolidated effective tax rate was due primarily to an increase in activity in the Company’s international businesses, which have lower effective tax rates.
The Company has several credit facilities and private placement notes, some of which require them to adhere to certain covenants and restrictions, including a restriction on dividend payments. They have a $1.0B senior credit facility maturing in September of 2016, $100.0M private placement notes maturing in April of 2015, $175M private placement notes maturing in October of 2017, and $225.0M private placement notes maturing in October of 2020.
Operating margin was 25.3%.
Operating cash flow was $99.561M.
Free cash flow was $82.6M.
Valuation & Capital Structure
$30.3 million - Cash & Cash Equivalents
$424.9 million - Debt
$7.53 billion - Market Cap
$7.92 billion - Enterprise Value