STERICYCLE SRCL

1
STERICYCLE(SRCL)

• Ross Pevitz
• Matt Storkman
• Shengdong Zhu
• RCMP Presentation
• April 10, 2007

2
Position

• May, 2001 Bought 200 Shares
• Purchase for 19.47 (3,894)
• Current Price is 81.92 (16,384)
• 12,490 Unrealized Gain
• 5 of Portfolio

3
History

• 1989- Stericycle founded
• Medical Waste Tracking Act
• Strict regulations for dealing with Medical Waste
• Afford convenient, cost effective, and efficient
  solutions
• 1993- Acquired over 116 companies since 1993
• 1996- IPO
• 2000- North Americas Largest Provider of
  regulated Medical Waste Management Services

4
Company Background

• Headquarters in Lake Forest, IL
• Largest and Only Full-Service Provider
• 351,700 Accounts
• Growing Presence Internationally

• Major operations UK, Ireland, Mexico, Canada,
  Brazil, Argentina, South Africa, Australia, and
  Japan

5
Products and Services

• Mission Help healthcare organizations reduce
  risk, provide a safer workplace, and stay in
  compliance with national, state, and local
  regulations.
  
• Offer collection, transportation, treatment,
  disposal, and recycling of medical waste
• Treatment Incineration (burn), Proprietary
  Autoclaving (steam) Proprietary ETD,
  Electro-Thermal Deactivation (grinding)

• Stericycle
• Medical Waste Services 
• Bio-systems
• Sharps Management 
• Water Management Service 
• RX Waste Compliance Program 
• Pharmaceutical Services

6
Products and Services

• Offer training, educational, consulting, and
  documentation services
• (Steri-Safe)
• OSHA and HIPPA Compliance Occupational Safety
  and Health Administration, Health Insurance
  Portability and Accountability Act
• Product Sales

7
Industry Supply

• Fragmented
• Local Providers, Onsite Treatment, Alt. Treatment
• Competitive
• Drive Cost, Quality, and Geographic location
• Highly Regulated
• EPA, DEA, FDA, OSHA, DOT, State/Local
• Insulated from Economic Cycles
• LT contracts, Nature of Industry
• Large Account Customers vs Small Account Customers

8
Industry Demand

• Pressure to Reduce Healthcare Costs
• Aging Population
• Baby Boomers
• Better Health Care
• Stricter Environmental and Safety Regulations
• Larger Fines and Unaware market

9
Economic Risks

• Interest Rate, Inflation, GDP, Competition
• Energy Costs
• Transportation and Treatment
• Foreign Exchange Risk
• Changing Government Regulations!!!
• Patent and Trademark Expiration
• Liabilities and Insurance
• Clean up costs, personal injury, ect.

10
Competitive Advantages

• Established Brand Name and Market Leader
• Strong Management Team
• Low Cost Operator
• Economies of Scale
• Full Service Provider
• Vertically Integrated, growing Horizontally
• Loyal and Diverse Customers
• Revenue retention gt95
• Largest customers lt2 of Revenues
• LT contracts with automatic renewal and price ?
  provisions

11
Company Growth

• Shift From Large to Small Customers
• Bigger Gross Margins
• 55-60 small vs 15-30 large

• Expand Range of Services and Products (Organic)
• Expand Bio-Systems
• Since acquisition of Scherer Healthcare, Inc. in
  January 2003
• Grow Pharmaceutical Services
• Proprietary data system to remove expired or
  unsafe products

12
Company Growth

• Continue Acquisitions
• Focus on strategic tuck in
• Proven Integrator 116 acquisitions since 1993
• Mainly Asset Purchases
• Price determined by multiples of EBITDA and
  quality of asset

Revenues
13
Company Growth

• Increasing Margins
• Sell Premium Steri-Safe Service
• Customer Size
• Acquisitions- lagged
• Slightly Offset
• Bio-systems
• Intl Emergence

EBIT
CAGR- Compound Annual Growth Rate
Margins
14
Company Growth

• Global Markets
• Expand Technology Licensing
• Australia, Brazil, Japan and South Africa
• Acquire Lead Position
• Canada and UK
• JV or Partnership
• Mexico and Argentina
• Small Initial Outlay
• Very Selective in Process

15
Cash Flow Valuation Model

• Revenue growth projected to continue, through
  both organic growth and steady acquisitions
• Assets for sale amount booked in 2006 is expected
  to be liquidated in 2007 for cash inflow (net
  26.5M)
• Continuing trend of acquisitions, though with
  lower margins
• Acquisitions have been paying off as margins have
  held steady and have even increased from 1999

16
Discounted Cash Flow

• WACC calculated to be 6.93
• This figure was based on the highest beta
  estimate of 0.4 (provided by Bloomberg)
• Other agencies have estimated negative and zero
  Beta
• Cap structure is 86 equity (market value)
• Cost of Equity 7.44 Cost of Debt6.10
• Margins projected to decrease from 2004/2006
  levels

17
DCF

• Selling, General and Administrative expenses are
  forecast to increase from 18 to 20 of sales due
  to increased requirements of management for
  maintaining company infrastructure
• Discounted Cash Flow valuation yields a range of
  value from 81 99
• DuPont Analysis reveals coherent assumptions and
  slowly decreasing margins

18
Sensitivity Analysis on WACC and Terminal Growth
Rate

A range from 70.51 to 103.81
19
Competitors

• Who?
• American Ecology Corp (ECOL)
• Microtek Medical Holdings Inc. (MTMD)
• Waste Management, Inc (WMI)
• Waste Management Industry
• Why?
• Industry specific
• Strong/Solid performers
• Multiples in line with Industry

20
Critical Multiples Comparison

• Gross Margin
• Operating Margins
• Enterprise Value/Revenue
• Enterprise Value/EBITDA
• EPS

21
Performance Vs. Competitors
22
Stericycle Comparable Companies Valuation

• P/E
  50.19
• Enterprise Value/EBITDA 42.00
• Enterprise Value/Revenue 30.64
• Comps Valuation Price 40.94

23
Portfolio Analysis

• Small Correlation with Market
• Good Diversification with Portfolio

24
Valuation Discussion Hold

• The low estimate of the discounted cash flow
  valuation represents the current market price of
  SRCL
• 81 is also the year-high for the stock
• Comparable company valuation places a much lower
  value on the stock
• SRCL is trading at a large premium compared to
  its peers
• SRCL outperforms all of its peers in operating
  metrics such as gross margin and operating margin
• DCF analysis and forecasting provide reasoning
  and reinforce the markets premium for SRCL
• Analyst Team recommends holding SRCL

25
Questions?

• Love to Entertain!!!