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STERIS (STE) Cuts 2017 View: Will it See Gloomy Days Ahead?

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On Feb 09, we issued an updated research report on Ohio-based STERIS plc (STE - Free Report) – a manufacturer and marketer of infection prevention, decontamination, microbial reduction, along with surgical and gastrointestinal support products and services. The company currently carries a Zacks Rank #4 (Sell).

STERIS ended third-quarter fiscal 2017 on a dismal note, with earnings and revenues both missing the Zacks Consensus Estimate. The company’s lowered revenue and earnings guidance for fiscal 2017 hints a gloomy operating scenario in the days ahead. Consequently, the company’s share price, which trended above the Zacks Categorized Medical - Instruments industry over the last three months, has nosedived and is currently trading significantly below the broader industry. The stock has gained 2.77% which is much below the 5.38% gain of the broader industry.  

We note that, the government’s and insurance companies’ consistent efforts to curb the rising healthcare costs have been putting pressure on the stock for quite some time. We are also concerned about the current customer consolidation scenario which will continue to adversely impact the company, unless checked immediately. The competitive landscape and weak cost reduction initiatives also remain an overhang.

On a positive note, organic growth performance was strong across most of the segments. Further, growth in free cash flow reserve is indicative of the strong cash balance reserve the company currently holds.

We note that, Synergy Health – the company STERIS acquired last year, was one of the primary contributors to the strong double-digit revenue growth observed by the combined company. Going ahead, management expects Synergy to contribute between $640–$650 million or a low-single-digit growth in fiscal 2017.

Key Picks

Better-ranked medical stocks include Glaukos Corporation (GKOS - Free Report) , Cardiovascular Systems and Neogen Corp. (NEOG - Free Report) . Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Glaukos gained over 100% in the last one year  compared with the S&P 500’s gain of 26.2%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year compared with the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 37.8% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth rate of 16.7% for the next five years compared with the industry average of 15.2%.

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