Investing 03-06-2024 13:02 19 Views

Waste Management nears $7B Stericycle acquisition: Time to buy Stericycle shares?

Stericycle Inc. (NASDAQ:SRCL) is in the spotlight as Waste Management Inc. (NYSE: WM) moves closer to acquiring the medical waste disposal company for $7 billion, including debt. This potential deal, reported by The Wall Street Journal on June 2nd, could be announced soon.

The acquisition includes Stericycle’s long-term debt of $1.384 billion, leaving shareholders with a significant gain. Considering the debt, Stericycle shareholders could see a further upside of over 15% if the deal finalizes.

Bloomberg had earlier reported on May 24th that Stericycle was exploring a sale, which sent its shares soaring. The company’s stock rose more than 13% after the news broke.

Stericycle specializes in disposing of biohazardous and pharmaceutical waste from medical facilities. In contrast, Waste Management is a leading trash and recycling collection firm in the U.S., expanding its portfolio with this acquisition.

Business fundamentals and recent performance

Stericycle has faced some challenges with its recent earnings. Its first-quarter revenue fell 2.8% year-over-year to $664.9 million, primarily due to divestitures. However, the company remains optimistic about margin improvement and cost reductions.

Analysts have a mixed view of Stericycle, with some highlighting the potential for profitability improvement. The company’s EBITDA margins have shown positive trends, and cost-saving initiatives are expected to drive future growth.

Waste Management, on the other hand, continues to perform strongly. The company reported a 5.5% year-over-year revenue growth in the last quarter. Despite missing revenue expectations slightly, its profitability and efficiency improvements are noteworthy.

Valuation

Stericycle is currently valued with a forward EV/EBITDA multiple of around 14.03 times for FY 2024. Analysts see potential for this multiple to rise as the company improves its margins and achieves its growth targets. Waste Management, though considered overvalued by some, remains a robust and steady performer in its sector.

With the potential $7 billion acquisition by Waste Management, Stericycle shareholders have a lot to look forward to. Despite the inclusion of debt in the deal, there is enough room for substantial gains for shareholders. So, should you buy Stericycle’s stock and sell it to Waste Management if the deal goes through? Let’s see what the charts have to say about that.

The $40 fortress: A resilient support

Stericycle’s stock experienced a significant downtrend between October 2015 and December 2018, plummeting from above $140 to below $40. This was followed by a recovery to around $80 between January 2019 and May 2021, but the stock then entered another downtrend, falling back to the $40 level. Throughout these fluctuations, the stock has frequently found support near $40.

SRCL chart by TradingView
On May 24th, the stock saw a spike following the news that Stericycle was exploring a sale. Absent this spike, the stock would have presented an attractive entry point for bullish investors near $44. However, it’s not too late for investors, as the stock is showing bullish momentum on short-term charts. Those optimistic about the deal can consider buying at the current price of around $51, with a stop loss at $44.6.

For traders who believe the deal may fall apart, shorting the stock now is not advisable. If the stock’s price action weakens over the next few days and falls below $48, a short position could be initiated with a stop loss at $54.2. Should there be signs that the deal faces obstacles or fails, the stock could drop back to its support near $40, where profits can be booked.

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