Whatever your take on health care in America, one thing’s for sure: The U.S. health care system creates a lot of waste — millions of tons each year of the nastiest stuff you can imagine. 

#-ad_banner-#Soiled wound dressings and surgical gloves, used syringes, discarded surgical instruments… even human tissue left over from surgery. The same goes for plenty of other countries, too.

Sounds like just the investment opportunity you were looking for, right?

Well, it actually could be. Somebody’s got to collect, treat, and properly dispose of all that odious and potentially hazardous medical waste — and there’s a whole industry devoted to that.

The nice thing is you don’t have to research a bunch of different medical waste management firms just to pick the one or two you think are worth your investment dollars. In the decidedly unappealing world of medical waste, there’s one undisputed champ.

This firm’s stock has at least 70% upside and is a good bet to beat the market in coming years, in my opinion. It certainly has a history of market trouncing, delivering more than 27% a year for the past 15 years, compared with a 4.4% rate of return for the S&P 500 during the same period.

I’m talking about Stericycle (Nasdaq: SRCL), a briskly growing $10.1 billion firm with 566,000 customers worldwide, annual revenues of $2.2 billion, and as much as a 40% market share (depending on whose estimate you go by).

Regardless, Stericycle is clearly the medical waste management industry’s go-to player. Industry veteran Lloyd Lippman, who long ago pioneered one of the first medical waste treatment facilities, told Barron’s, “They are absolutely the dominant force in the industry.” And that was back in 2002.

If anything, Stericycle has become even stronger since then, and it boasts growth and profitability metrics most rivals can only envy, especially in terms of net income growth. The firm also has a better debt-to-equity ratio, a key indicator of a company’s financial leverage.

Along with willingness to do extremely dirty work, one of Stericycle’s main advantages is a high level of expertise in the extensive industry regulations that exist domestically and internationally. With customers in all 50 states, Puerto Rico, and 11 foreign countries, the firm must be thoroughly familiar with the requirements of every jurisdiction it operates in with regard to proper handling and disposal of medical waste and the many permits necessary to do the job.

What’s more, the laws and regulations covering these activities are numerous and present at all levels of government. They change often and new ones are regularly enacted.

But that’s great for an expert like Stericycle. Because it operates in an increasingly complex regulatory environment where compliance costs can be considerable, health care providers and facilities are more likely than ever to outsource their medical waste management. 

To win so much of this business, Stericycle provides packaged sets of services to address every aspect of medical waste treatment and disposal, including compliance. 

The firm offers some crucial ancillary services, too, like help with handling recalled or returned medical devices and expired or recalled pharmaceuticals. It has a worldwide network of nearly 400 locations involved in the management of medical waste including transfer sites, processing facilities, and service facilities.

Because of its expertise, comprehensive services and scale advantages, Stericycle has been able to convince most of its customers — more than 95%, according to management — to sign multi-year contracts. These generally include pass-through price increase provisions, so the firm usually has a very predictable revenue stream with regular growth built in.

Going forward, management sees particular opportunity in the small-quantity (SQ) end of the business, which already makes up 96% of Stericycle’s customer base. SQ customers are organizations like outpatient and acute-care facilities, dental practices, pharmacies and others that create low medical waste volumes. Usually, SQ accounts generate higher margins because they’re easier to handle, whereas large-quantity (LQ) customers like hospitals and drug makers are generally lower-margin since they’re more complex and costly in terms of compliance.

Besides increased outsourcing of medical waste management, certain trends should help boost growth in the SQ segment. One is simply the graying of the population in the countries where Stericycle does business. As people age, they’ll need more health care, and this will likely create even more medical waste. Also, to cut costs, insurance companies will likely be directing patients as much as possible to smaller, cheaper outpatient and acute-care facilities, which are usually at the SQ end of the spectrum in terms of the amount of medical waste they create.

Risks to Consider: Although Stericycle has long been able to operate successfully in a heavily regulated industry, regulations could eventually become onerous and costly enough to bog down operations and slow profit growth considerably.

Action to Take –> Stericycle does some of the dirtiest work on the planet, but it’s clearly the industry leader. Thus, it’ll likely keep getting lots of repeat business, winning the most new customers, and growing the top and bottom lines by 15% to 16% a year — like it has for a decade.

At those growth rates, earnings could climb to at least $7.30 a share in the coming five years from the current $3.62. This gives the stock about 70% upside to $202 from the recent price of $119, based on a projected price-to-earnings (P/E) ratio of 28.

However, upside could be as much as 90% if Stericycle’s P/E stays around 31 as it has historically. Either way, investors who buy the stock now are likely to be well-rewarded.

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