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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.

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

61.8x EBITDA

5.8x Book

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Comments (28)

  • craigje1992's picture

    Mr. Machina - thanks if you do take a look at it. and there we go.

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • drexelalum11's picture

    This is a summary of their business and quarterly results. Good ER is forward looking; everyone knows what already happened. You make money by knowing what is going to happen.

  • In reply to drexelalum11
    WhiteHat's picture

    drexelalum11:
    This is a summary of their business and quarterly results. Good ER is forward looking; everyone knows what already happened. You make money by knowing what is going to happen.

    Agree. It seems like you basically echoed what their quarterly earnings press release said. You need more analysis about the actual company and what the catalysts are going forwards, leading to some estimates and other forward looking bullshit.

  • craigje1992's picture

    drexelalum11 - okay makes sense, so then i figure out what's going to happen, how they're going to perform, by, what, understanding the industry? or comparing current results to previous quarters' results and guidance/analyst projections? orrrr what else i guess?

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • bearing's picture

    Ahhhh my eyes. It seems you are trying to create a breaking news report (when the company announces results and you have to write something in 20 minutes) rather then an actual initiation/maintenance piece. If you are trying to create the former the first paragraph should be key results vs your estimates vs the streets. Focus on big stuff like sales, EBITDA, EPS and adjusted EPS. Include any big news here that stood out. Second paragraph should be any relevant divisional information. Third is company specific news like if the have been following their restructuring plan, anything industry related, net debt has been decreasing etc. Last paragraph is outlook, usually a snippet highlighting information from your earnings preview on how you got everything right and how you are going to be right again. Everything else you could just make a table for instead of wasting three paragraphs of space.

  • craigje1992's picture

    Okay, alright, so then the diff between this (with projections included) and an er report, would be that an er report really just expands on all this and goes off on industry-related stuff, yeah?

    Also, should i include dcf model if i decide to come up w a target price?...or, for that matter, how do you even derive a target price?

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • In reply to craigje1992
    Flake's picture

    craigje1992:
    Okay, alright, so then the diff between this (with projections included) and an er report, would be that an er report really just expands on all this and goes off on industry-related stuff, yeah?

    Also, should i include dcf model if i decide to come up w a target price?...or, for that matter, how do you even derive a target price?

    I don't know what this pile of shit is but it's not a research report...not even close.

    Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

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  • bearing's picture

    When you are writing an initiation report the point is to tell your clients I am now following this company and I think this is a strong buy or a strong sell and here are my reasons; look how smart and incisive I am. Everything you wrote in the op is just numbers clients can get from any data provider. Your value add as an analyst is your ability to take that data and come up with an investment thesis and effectively broke that thesis to generate business for the firm. Everything else the dcf, models, sotp, industry analysis, porter's 5 forces, divisional breakdown etc is all used to support your opinion.

  • craigje1992's picture

    Okay, here is what I would have put for my forward-looking considerations.....

    Is it supposed to sound anything like this?????

    ____________________________________________________________________

    Poised for robust growth going forward

    First quarter results, business model, and more point to a positive fiscal 2012. The company successfully closed 11 transactions, 6 domestic and 5 international. These eleven acquisitions stand amongst the 265 completed since 1993. Use of strong free cash flow drove growth through these 11 acquisitions, and probably will continue considering their track record successful deal completion and integration. By the end of the first quarter, there were approximately 528,000 accounts. 16,000 were large accounts (of LQ customers) and 512,000 were small accounts (of SQ customers). Considering their deep penetration among SQ customers historically and the fact that they generate higher gross margins, the Company will continue to leverage this going forward. The Company also has a plan to continue to expand geographically, which, based on their international track record historically, suggest future success in this area. The Company also plans to expand their Sharps Management Service program and their Pharmaceutical Waste Disposal program, both of which have been positively synergistic with existing infrastructure. In summary, my research suggests that Stericycle is poised for a consistently robust growth in fiscal 2012.

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • In reply to bearing
    Flake's picture

    bearing:
    When you are writing an initiation report the point is to tell your clients I am now following this company and I think this is a strong buy or a strong sell and here are my reasons; look how smart and incisive I am. Everything you wrote in the op is just numbers clients can get from any data provider. Your value add as an analyst is your ability to take that data and come up with an investment thesis and effectively broke that thesis to generate business for the firm. Everything else the dcf, models, sotp, industry analysis, porter's 5 forces, divisional breakdown etc is all used to support your opinion.

    He's still not getting it. He's just paraphrasing the press release/filings.

    Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

  • BigHedgeHog's picture

    "my research suggests that Stericycle is poised for a consistently robust growth in fiscal 2012"

    what "research" did you do?

  • bigun's picture

    lol guys, chill, hes still young..

    but seriously, lots of sell side reports look like what you have there, u just need to add in something like "industry prospects look favorable, xyz project will generate substantial free cash flow starting 20xx, company being valued on core business alone with call option on xyz project, forward EPS xx, forward projected p/e at 7x"

    and BOOM, great sell side report, dont forget, NEVER, EVER give solid reasons to why you think xyz project will be successful, because no one does, why give reasons when you can put out a solid forward P/E multiple, i mean, god, honestly, nothing is going to sound more confident then slamming a good P/E multiple in the retail guys face

    oh yeah, dont forget to check off the disclosure box stating your firms good IDB relationship (or future expected business) with said company

    got it? good.

  • craigje1992's picture

    BigHedgeHog - it was my first ever report of any kind, so I was just trying to make it sound nice i guess. idk. shouldn't have done wrote down any bs. but i can and will do better hopefully.

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • bearing's picture

    You are writing like a reporter instead of an analyst. First off your rating should always go first. What it should sound like is:

    "We are initiating coverage on Stericycle with a buy rating. We believe that the companies strong predicted FCF generation of XX% and recent acquisition of XXXXXXX provides the key catalyst for robust multiple expansion. The company is also well insulated from negative economic pressure due to its deep and varied customer base and high margins of XX% relative to the industry average of XX%. We also see 2013 EBITDA growth further accelerated by XX% with continued geographic expansion in XXXX region and cost savings benefit from the development of Sharps Management Service Program and Pharmaceutical Waste Diposal program. From our DCF anaylsis we derive a target price of $XX."

    From here you break you report into expanding on all your key points and industry analysis. Easy peasy

  • R0bin's picture

    This is like a regurgitation of the 10K business overview section. Any thoughts on Stericycle everybody?

    Baby you're the perfect shape, baby you're the perfect weight. Treat me like my birthday, I want it this way and I want it that way. It makes a man feel good baby.

  • craigje1992's picture

    Okay. Thank you, everybody. I appreciate your suggestions and advice. I will use these to do much, much better.

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • craigje1992's picture

    Robin - are you covering them?

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • In reply to craigje1992
    R0bin's picture

    craigje1992:
    Robin - are you covering them?

    No, I don't, maybe somebody who does will respond.

    Baby you're the perfect shape, baby you're the perfect weight. Treat me like my birthday, I want it this way and I want it that way. It makes a man feel good baby.

  • MMBanker14's picture

    Check out ValueInvestorsClub.com. They have some decent write-ups, and I assume that's more of what you want yours to look like.

  • In reply to bearing
    Amphipathic's picture

    bearing:
    You are writing like a reporter instead of an analyst. First off your rating should always go first. What it should sound like is:

    "We are initiating coverage on Stericycle with a buy rating. We believe that the companies strong predicted FCF generation of XX% and recent acquisition of XXXXXXX provides the key catalyst for robust multiple expansion. The company is also well insulated from negative economic pressure due to its deep and varied customer base and high margins of XX% relative to the industry average of XX%. We also see 2013 EBITDA growth further accelerated by XX% with continued geographic expansion in XXXX region and cost savings benefit from the development of Sharps Management Service Program and Pharmaceutical Waste Diposal program. From our DCF anaylsis we derive a target price of $XX."

    From here you break you report into expanding on all your key points and industry analysis. Easy peasy

    Exactly, ER reports like writing bs college humanities papers, just need to fit the template. And if you wanted to covert this to one, just replace company with surrealist multicultural writer, DCF with white male oppression, Bernanke with Chomsky, and EBITDA with post-colonial socialist societies and BOOM done. cfa l1 wasn't a complete waste of time after all.

  • West Coast rainmaker's picture

    I would add something about how the market is valuing the stock. Is it trading according to P/E, or P/S? Is it a web company living off of P/ Eyeballs, or a financial institution trading on P/BV?

    You can then say something like, "Within its industry, company XYZ is expected to experience above average earnings growth of Y%. With a price to earnings ratio comparable to peers, we do not believe its earnings growth potential has been priced in.

    The industry is also trading well below its ordinary P/E ratio of ??x. We believe this is due to [Europe/The Arabs/Alien Attack]. However, the industry is well insulated from effects of [aforementioned problem], and should therefore revert to historical multiples.

    As company XYZ normally trades near the industry average, our data suggests that it will experience multiple expansion as the industry rebounds. Therefore, we are setting a price target of $$$, based on a forward earnings of $$$ and an expected P/E ratio of XXX. Based on the current price, this implies an upside potential of %%%, warranting a buy rating. "

    I am new to the industry, although I have read a fair number of sellside reports. The key points are:

    How does your view differ from the market?

    What is going on with the company's industry? Is it serious?

    How does the market value the company?

    How much money could an investor make if you are right?

    Bonus points if you can point out macro factors, or market overreaction (e.g. stock price plummets when mediocre CEO dies).

    Edit: Saw bearing's post, and he wrote about the same thing, but better.

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  • In reply to bigun
    craigje1992's picture

    "Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."

  • smpat04's picture