Trading at a 30% discount to our fair value estimate, shares of this wide-moat provider of regulated medical waste management offer a compelling margin of safety for longer-term investors.
We had the opportunity to fine-tune our fair value estimate to $105 from $110 per share for wide-moat Stericycle
after the company revealed a more comprehensive longer-term strategy during its first-ever investor day on Nov. 10. Much of the change stemmed from lowering our assumptions for organic revenue growth in Stericycle’s small-quantity customer segment from 3% to just over 1% over the course of our five-year forecast period. This also led to compression of our originally forecast adjusted EBITDA margins from 26.8% to 26.1% at the midcycle. However, the event validated our assumptions for outsized growth at Shred-It, Communications Solutions, and Retail Hazardous Waste, which continues to support our assertion that Stericycle can sustain midcycle organic revenue growth rate of 5%. This is the first time that Stericycle offered a three- to five-year outlook with this much detail, which strengthens our confidence that our discounted cash flow model employs reasonable assumptions in light of all of the opportunities and challenges currently facing the company. Moreover, at a 30% discount to our new fair value estimate, shares still offer a compelling margin of safety for longer-term investors.
Barbara Noverini is a senior equity analyst for Morningstar.
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