Asher Jacobs and Jade Hu’s presentation on Stericycle Inc (SRCL) at the Kase Learning conference on short selling, 5/3/18.
Asher Jacobs & Jade Hu On Stericycle Inc (SRCL)
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I'm Asher Jacobs here with Jade Hu from Columbia Business School and we like to acknowledge our teammate run up printed Jollie who unfortunately was unable to attend today's event presenting a short thesis and start a cycle with a price target of thirty eight dollars presenting 36 percent downside over the next 18 months. Our thesis is threefold. 1 We believe that the fall out from star cycles recent class action settlement over its pricing tactics is still in the early innings. I'll continue to derive revenue and margin declines to 4 turns the leverage in high short term cash requirements start a cycle will be unable to continue its role of strategy in the coming years and 3 numerous accounting red flags that highlights are cycles deteriorating fundamentals that should concern investors so quick background the company Sturr syke was founded in 1989 and has since grown through nearly 500 acquisitions company historically has focused on the medical waste market. Been a leader with around 70 to 80 percent market share in that space and in the medical waste save say for example you go to the doctor's office or hospital the doctor or nurse will take a syringe or other medical waste dispose of it in the red trash bin or red box on the wall stair cycle will come in and dispose of that medical waste appropriately. Customers are divided into two buckets. L.K. when Eskimo elk or large quantity medical waste generators such as hospitals or other large facilities.
They offer lower margins but there are cycles psycho's bread and butter the stores cyclists focus has been on the cure swoll quantity medical waste generator say doctors small doctors offices or small clinics to offer much higher margins and that's been Stara cycles focus and throughout her presentation will be focusing primarily on this rescue business and the headwinds the company's been facing. More recently in the past few years started cycle has expanded its offerings its compliance offerings to shredding through its 2015 acquisition of shredded environments on hazardous waste and communications services which include answering services for doctors lawyers and other professionals. Call centers and recall related services as you can see the focus is the domestic small quantity of regulated medical waste which which constitutes around 25 percent of revenue. Yet more than 40 percent of the Sastre pass this company has grown through acquisitions to build a 70 percent market share. Q A medical waste business that's pricing is at least 30 percent higher than his competitors and in the past has managed to increase pricing up to 18 percent by the end. Its contact Lunts usually five years long with a little bit of flexibility. However going forward we expect that ability to increase pricing to be capped CAPTA 5 percent annually. There will have to price match to our competitors given an increasing competitive threats and their contract will be shortened to three years due to increasing competitive tension as well. As a result their margins expect to go down. In addition their balance sheet will be too stretched to make further acquisitions which is what they have relied on historically. So you might be wondering what has prompted this deterioration in the business. 2015 A lawsuit was filed against the company for its price increase of up to 18 percent annually last year in October.
A settlement of two hundred ninety five million was reached and has brought the psycho's price doubting has said forefront. Our research shows that the store cycle has daftest retention department at record level to stop customers from leaving the firm. However our conversations with five different private players in the market. The competition is heavily spending on marketing to win over Stewart psycho's customers. So the key takeaway from this flat is the impact that this lawsuit is much more than two hundred ninety five million but it has prevented this cycle from increasing its pricing going forward. So we also did a price comparison of suicide and close of its competitors in four different cities. So we have highlighted steerer cycle as priced at a premium of 50 100 per sun in these markets who want to bring to our attention that there has been a major shift in its business philosophy to allow more flexibility in its pricing and also to contract terms. However even with the new pricing their prices are substantially higher level than its competitors which means side foot older contracts those those contracts are priced at a much higher level and would have more room to draw pricing. As a result we expect the revenues to climb by 7 percent primarily driven by its inability to face pricing going forward. The sudden sharp contrast to the 10 percent pricing increase they've had in the past on the volume side.
We also expect volume to go down by 7 percent which is less severe than before as the company is aggressively making price concessions to hang and gave the customers however given the high fixed cost structure and this business has a 7 percent decline in revenue will translate into 14 percent decline in Dot in addition the healthcare industry has been going through consolidation which has shrunk the customer base for us. Q The most profitable business for your whole cycle as you can see in this chart the percentage of physicians that are employees for large hospital groups have increased from 42 percent to 47 percent since 2012. That's a result.
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