Peltier: Should You Buy Stericycle?

This column was first published on RealMoney at 9:38 a.m., May 15, 2008. For more commentary on today's action from the RealMoney writers, click here for a free trial.

One of my favorite strategies after earnings season is to find stocks that are trading lower despite reporting better-than-expected results. In fact, earlier this month, I ran a screen of these names for TheStreet.com Value Investor newsletter, where the model portfolio is currently up 10.51% year-to-date. (By comparison, the S&P 500 is down 3.32%.)

One name that made the list was Stericycle (SRCL Quote - Cramer on SRCL - Stock Picks), a medical-waste disposal company. Stericycle has about 400,000 customers in the Americas and the U.K. and is a leader in the business of disposing medical waste, with about 70 processing centers around the world.

The company posted better-than-expected first-quarter results April 23. Stericycle earned 39 cents a share, which was a penny ahead of consensus analyst expectations. Revenue grew 20.7% year-over-year to $254.8 million, and also came in $8.1 million higher than the estimate.

Despite the strong quarter, the stock closed Wednesday at $52.42, down 4% since the report and more than 11% year-to-date.

Don't Get Stuck With Stericycle

The question here is simple: Should you snap up shares of Stericycle or pass it over? This is my bailiwick as the manager of TheStreet.com Value Investor. So, let's take a closer look.

Despite its strong quarter and stock pullback, Stericycle is not cheap at current levels, equal to 31 times expected 2008 earnings of $1.69 a share, compared to 15.4 for the S&P 500. While the company posted 11.5% organic revenue growth in the first quarter, the valuation is still a hefty premium considering that Stericycle has posted an average of 18% annual earnings growth.

Stericycle's valuation is also well above the 25.5 times earnings and 21.3 times earnings multiples that other hazardous waste disposal companies Clean Harbors (CLHB Quote - Cramer on CLHB - Stock Picks) and American Ecology (ECOL Quote - Cramer on ECOL - Stock Picks) command. Stericycle also has far more debt on its balance sheet than these other firms, equal to 100% of common equity, as of the most recent quarter.

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