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Under the Radar: Stericycle Dumps Rivals

"Under the Radar" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.

The ideal stock offers three things: a compelling story, a margin of safety and a low price. In the case of Lake Forest, Ill.-based Stericycle (SRCL - Get Report), two out of three ain't bad. Ratings

In the summer of 1987, swimmers on the Jersey Shore and Long Island were alarmed as medical waste, including blood vials and syringes, bobbed in the waves and washed ashore. It was clear that more stringent medical-waste regulation was necessary and, in 1988, Congress passed the Medical Waste Tracking Act, which initially required medical waste to be incinerated. Shortly thereafter, Stericycle was founded.

Since its inception, the company has pursued aggressive growth by undercutting competitors, securing long-term contracts and, in 1993, adopting an acquisition strategy. Stericycle has completed 157 acquisitions, including 114 in the U.S. and 43 internationally. The company hopes to keep growing its leading market share in the medical waste disposal industry and outshine rival Waste Management (WMI).

Stericycle is thriving. It not only offers disposal services, but advises hospitals and doctors' offices on how to properly reduce and store medical waste in compliance with federal and state laws. The company's first-quarter revenue climbed 8.8% to $255 million, as net income jumped 28% to $41 million and earnings per share climbed 34% to 47 cents.

I am less than thrilled about the company's balance sheet, which holds $724 million of long-term debt, $8 million in interest expenses and just $12 million of cash. Stericycle has to fuel its growth somehow, and recent acquisitions have been well-integrated. Still, a healthier cash balance and lower debt burden should be long-term financial goals.

Unfortunately, investors have recognized the company's strengths and, consequently, its stock trades at a high level. Stericycle has a price-to-earnings ratio of about 29, indicating a premium to its average peer and the overall market. But the high cost is justifiable, if you consider the company's growth potential and recent returns. The stock has doubled four times since the company went public in 1996.

The Ratings gives Stericycle a "buy" recommendation.

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