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STERIS (STE) Strategic Buyouts Aid Growth, Margin Woe Stays

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STERIS plc (STE - Free Report) has been gaining from its strong segmental performance for the past few quarters. Robust demand for the company’s products buoys optimism. However, stiff competition and persistent macroeconomic woes raise apprehension. The stock currently carries a Zacks Rank #3 (Hold).

Over the past year, STERIS has outperformed the industry it belongs to. The stock has gained 25.1% against the industry’s 4.9% fall. STERIS exited the third quarter of fiscal 2022 with better-than-expected earnings. The year-over-year growth in revenues and earnings appears promising. The robust performance across three of STERIS’ reporting segments contributed to the top line.

Significant revenues from the acquisitions of Key Surgical and Cantel Medical appear promising. In this regard, we may note that consumable revenues from both Key Surgical and Cantel Medical accounted for about 60% of approximately $210 million in acquired revenues within the healthcare segment. The company expects the ongoing supply chain and inflation-related headwinds to be somewhat offset by higher cost synergies from the Cantel Medical integration and continued operational improvements.

Further, a substantial capital equipment backlog across Life Sciences and Healthcare segments indicates robust underlying demand for STERIS’ products. Expansion in the gross margin is an added advantage. The seamless integration process of Cantel Medical, ahead of expectations, buoys optimism for the stock. The raised EPS guidance for fiscal 2022 is indicative that this growth momentum will continue.

On the flip side, during the third quarter of fiscal 2022, SG&A expenses rose 70.3% year over year, whereas R&D expenses climbed 51% year over year. These escalating operating expenses led to a 141-basis-point (bps) contraction in the operating margin, building pressure on the bottom line.

During the quarter, the company also saw a year-over-year decline in free cash flow, given anticipated costs associated with the Cantel Medical acquisition and increased capital spending. The company continues to face increased material labor costs, which it anticipates to continue in the fiscal fourth quarter as well. The ongoing supply-chain challenges and inflation are added downsides. Stiff competition, pricing pressure and macroeconomic woes persist.

Also, the continuous adverse impact of the current customer consolidation scenario will hamper STERIS. The competitive landscape and weak cost reduction initiatives are also worrying.

Key Picks

A few better-ranked stocks in the broader medical space are McKesson Corporation (MCK - Free Report) , AMN Healthcare Services, Inc. (AMN - Free Report) and Bio-Rad Laboratories, Inc. (BIO - Free Report) .

McKesson, carrying a Zacks Rank #2, reported third-quarter fiscal 2022 adjusted EPS of $6.15, which beat the Zacks Consensus Estimate of $5.38 by 14.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

McKesson has a long-term earnings growth rate of 11.8%. MCK has gained 49.7% compared with the industry’s 4.7% growth in the past year.

AMN Healthcare, carrying a Zacks Rank #1, has a long-term earnings growth rate of 16.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 19.5%, on average.

AMN Healthcare has outperformed its industry over the past year. AMN has gained 23.8% versus the 62% industry decline.

Bio-Rad reported fourth-quarter 2021 adjusted EPS of $3.21, which surpassed the Zacks Consensus Estimate by 11.9%. It currently has a Zacks Rank #2.

Bio-Rad has an earnings yield of 2.3%, which compares favorably with the industry’s negative yield. BIO surpassed earnings estimates in the trailing four quarters, the average surprise being 66.9%.