Steris Corp. (STE - Snapshot Report) delivered an earnings surprise of 17.8% for the first quarter of fiscal 2013 (ended June 30). Shares for this provider of medical appliances and equipment have been rising following the solid results, and hit the 52-week high of $36.33 on September 24. Earnings estimates are also on the upswing, helping it achieve a Zacks #1 Rank (Strong Buy) status on September 19, 2012.

Solid Fiscal First Quarter

On August 2, Steris reported adjusted earnings per share of 53 cents for the first quarter of fiscal 2013, ahead of the Zacks Consensus Estimate by 17.8%. Net Income amounted to $30.4 million, up 5.6% year over year.

Revenues rose 6% to $337.0 million and surpassed the Zacks Consensus Estimate by 4.3%. On a segment basis, sales of Healthcare were up 3% to $229.5 million while Life Sciences rose 14% to $60.5 million. Revenues from the smaller Isomedix Services segment were up 10% to $46.1 million.

The company reported gross margin of 40.7% in the first quarter, lower than 41.7% a year ago. Operating income was up 3% to $48.3 million. Operating margin was 14.3%, down from 14.7% in the prior-year quarter.

Quarterly free cash flow turned around to $45.7 million from negative $3.6 million a year ago. The improvement came from improved management of working capital.

Steris Acquires US Endoscopy

On July 17, Steris revealed a definitive agreement to take over unlisted United States Endoscopy for $270.0 million in cash. Upon adjustment for tax benefit, the purchase price comes to $220.0 million. US Endoscopy was engaged in the production and marketing of medical equipment used in gastrointestinal endoscopy. In 2011, it had sales of $70.0 million and adjusted operating income of about $20.0 million.

Favorable Guidance

Following the proposed acquisition of US Endoscopy, Steris raised its forecast for revenue growth in fiscal 2013 to the range of 3% to 4% from zero earlier. The company maintained its forecast for reported earnings per share between $2.00 and $2.20 (which includes dilution of 5 cents from the proposed takeover). Adjusted earnings per share are expected to be in the range of $2.15 to $2.35.

Dividend Hike

On August 2, Steris hiked its quarterly dividend by 11.8% to 19 cents per share, representing a yield of 2.1% and a payout of 34.1%. The company has now raised the dividend for seven straight quarters. The stock offers a measure of regular income in addition to the possibility of capital appreciation.

Earnings Momentum Gaining

In the last 30 days, the Zacks Consensus Estimate has gained almost 1% to $2.20 per share, representing an estimated annualized growth of 1.7%.

For fiscal 2014, the Zacks Consensus Estimate crept up 0.8% to $2.45 in the same timeframe, reflecting year-over-year growth of 11.5%.

Favorable Valuation

Steris looks reasonably valued with respect to most valuation metrics. The stock is currently trading at a forward price-to-earnings (P/E) multiple of 16.2, a 13.8% discount to the peer group average of 18.8. The price-to-book ratio of 2.5 is 3.8% lower than the peer average of 2.6. With a trailing 12-month return on equity of 15.8%, the stock beats the peer group average by 30 basis points.

Chart May Indicate Breakout

After drifting last summer, the stock has rallied and is now trading above both its 50-day and 200-day moving averages. We believe the stock has potential to penetrate its resistance level. Steris has rallied 14.2% over the last six months, compared with 3.2% for S&P 500.

Based in Mentor, Ohio, Steris has a long history dating back to 1894 when the American Sterilizer Company was set up. Steris started off as Innovative Medical Technologies in 1985 and was later renamed as Steris in 1987. The company is mainly engaged in prevention of infection, contamination management as well as critical care and surgical know-how. It has a market capitalization of about $2.1 billion.

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