Can Stericycle (SRCL) Beat Earnings on Inorganic Growth? - Analyst Blog
Waste management firm Stericycle, Inc. SRCL is scheduled to report its second-quarter 2015 results after the closing bell on Jul 23. In the last reported quarter, adjusted earnings missed the Zacks Consensus Estimate by a couple of cents. Let’s see how things are shaping up for this announcement.
Key Factors in the Second Quarter
A significant portion of Stericycle’s historical growth is attributable to the successful integration of acquisitions in both domestic and international markets. The company is continuously on the lookout for strategic acquisitions that will enhance its market share and expand its geographic base.
During first-quarter 2015, the company closed 15 acquisitions of which 4 were domestic and 11 international. Stericycle will disclose the second quarter acquisitions in its earnings release. Subsequent to the end of the second quarter, Stericycle acquired information destruction services provider Shred-it International for $2.3 billion in cash. The transaction is likely to be completed in the fourth quarter of 2015. With Shred-it on board, Stericycle is expected to enhance its core compliance solutions portfolio and offer specialized services, thereby augmenting its value proposition to clients.
International growth rates are expected to accelerate due to increasing customer adoption of multiple services and expansion into new lines of business. The global acquisition strategy increases Stericycle’s customer base, by providing a long-term growth platform for selling multiple services. Whether the customer is a large hospital system or a retail chain, Stericycle provides multiple services to help them improve their operations and achieve their goals. As customers adopt these multiple services, they can almost triple their revenues in the long run. This in turn leads to incremental revenues for Stericycle.
At the same time, Stericycle is focused on increasing its small-quantity (SQ) customer base, as they generate higher gross margins than the large-quantity (LQ) customers. In addition, Stericycle offers multiple service offerings to its customers, which add to the value of each account. For its SQ customers, the services include Steri-Safe and clinical compliance offerings and for LQ customers – Bio Systems and Rx Waste Compliance. These efforts are likely to improve its profitability in the soon--to-be-reported quarter.
Earnings Whispers
Despite solid inherent growth potential, our proven model does not conclusively show that Stericycle is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.
Zacks ESP: Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This indicates a likely in-line earnings for the shares.
Zacks Rank: Stericycle’s Zacks Rank #3 (Hold) when combined with 0.00% ESP reduces the predictive power of ESP. Note that stocks with a Zacks Ranks of #1 (Strong Buy), #2 (Buy) and #3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Amazon.com Inc. AMZN, earnings ESP of +33.33% and Zacks Rank #2.
Caterpillar Inc. CAT, earnings ESP of +6.40% and Zacks Rank #1.
Fair Isaac Corporation FICO, earnings ESP of +12.50% and Zacks Rank #1.
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