In-Line Report for Stericycle

Stericycle, Inc. (SRCL) reported first quarter EPS of $0.39, in line with our expectations and up 21.9% year-over-year, amid increased penetration of the higher-margin Steri-Safe accounts. Double-digit sales growth in the domestic and international markets reflects acquisitions and a continued increase in Bio Systems and Steri-Safe accounts.

Management estimates FY08 net income in the range of $148 million to $151 million (excluding one-time items) with EPS between $1.67 and $1.70 (excluding one-time items). Revenues are expected in the range of $1.05 billion to $1.07 billion. Free cash flow during the year is expected between $140 million and $145 million and capital expenditures in the range of $45 million to $55 million.

However, increasing acquisition spending is driving sales, general and administrative expenses (SG&A) might put pressure on near-term operating margin expansion. We have valued Stericycle on a P/E basis using a forward earnings estimate. Currently, Stericycle shares are trading at 32.9x our 2008 EPS estimate of $1.69, above the companyâ?s three-year P/E range of near 30x.

Historically, the company trades at a premium to industry peers based on a superior earnings growth track record, leadership position in the medical waste industry, strong cash flow generation, and a strong management team. Moreover, with SRCLâ?s forward three-year profit growth decelerating to a range of 15% -17% from its historical level of 20%, we believe the valuation multiple, though remaining at a large premium to the market and the industry mean multiple, will not expand significantly.

We reiterate our Hold recommendation on shares of SRCL with a target price of $57 per share. Our target price is based on a P/E multiple of about 33.7x our 2008 EPS estimate of $1.69.