Can Stericycle (SRCL) Outperform in 2017 After Tough 2016?

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Waste management services provider Stericycle, Inc.SRCL had a hard time in 2016 owing to a challenging macroeconomic environment. The stock grossly underperformed the Zacks categorized Waste Removal Services industry last year with an average negative return of 36% compared with 17.9% for the latter.

Although Stericycle has a Value Growth Momentum score ( VGM score ) of 'B', it has a Zacks Rank #4 (Sell) that negates most of the positives. Our research shows that stocks with a VGM score of 'A' or 'B', when combined a Zacks Rank #1 (Strong Buy) or #2 (Buy), offer the best investment opportunities for investors. However, investors should better avoid stocks with a Zacks Rank #4 or #5 (Strong Sell), even if it has a Style Score of an 'A' or 'B'. (Looking for the Best Stocks for 2017? Be among the first to see our Top Ten Stocks for 2017 portfolio here .)

Stericycle operates in a highly-competitive market. The barriers to entry into the regulated waste collection and disposal business and the pharmaceutical returns business are very low. Furthermore, competitors often resort to aggressive pricing to gain market share. In the past, Stericycle was forced to reduce prices for large-quantity customers like hospitals, blood banks, and pharmaceutical manufacturers, due to competitive pressures. This forces us to be bearish on the stock to some extent.

The recent spate of acquisitions is further leading to higher overheads and integration-related expenses, which are weighing on margins. A decline in the availability of potential acquisition candidates in the future could adversely impact the company's growth rate. In addition, some acquisitions have lower gross margins and higher selling, general and administrative expenses that often nullify the synergies.

Moving forward, Stericycle expects a sedate performance in 2017, with earnings anticipated in the range of $4.57-$4.77 on revenues of $3.54-$3.67 billion. The guidance does not represent a marked improvement from 2016, wherein earnings are expected in the range of $4.74-$4.76 per share on revenues of $3.56-$3.58 billion.

However, Stericycle's network is the largest in the industry and provides it with routing efficiencies for its vehicles from the customer sites to the collection and processing facilities. This network is difficult to replicate and the lower costs further allow Stericycle to compete effectively on both service and price. Collection and transportation of medical waste account for the largest percentage of Stericycle's operating costs and thus gaining efficiencies in these is critical. Whether the company can leverage this competitive edge to improve its fortunes in 2017 remains to be seen.

Some better-ranked stocks in the industry include Waste Management, Inc. WM , Advanced Disposal Services, Inc. ADSW and Aqua Metals, Inc. AQMS , each carrying a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Waste Management has a long-term earnings growth expectation of 9.8% and has beaten estimates in all the trailing four quarters for an average earnings surprise of 4.8%.

Advanced Disposal Services has comfortably beaten estimates in the last reported quarter with an earnings surprise of 50%.

Aqua Metals has beaten estimates once in the trailing four quarters for an average negative earnings surprise of 18.3%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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