Peltier: Should You Buy Stericycle?

This medical-waste disposal company has plenty of good points, but is a bit expensive right now.
By David Peltier ,

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) - Get Report

, 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

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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) and

American Ecology

(ECOL) - Get Report

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.

And while the majority of company's business is contracted at a fixed monthly cost, revenue generated at some smaller businesses like dentist offices and cosmetic surgery centers are based on volume; these are expected to slow down in the current economic cycle. As a result, the consensus analyst estimate is for Stericycle's 2009 earnings growth is expected to decelerate to 15%.

While the company remains on track to deliver solid growth in a volatile market, investors should wait for a more reasonable price to purchase Stericycle. I'd avoid the stock at current levels, but re-consider if shares fell another 15% to 20% in the coming quarters.

David Peltier is the manager of TheStreet.com Value Investor and writes regularly for TheStreet.com about stocks that are value plays or deliver high-yields.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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