Back to top

Image: Shutterstock

Here's Why Investors Should Retain STERIS (STE) Stock for Now

Read MoreHide Full Article

STERIS plc (STE - Free Report) has been registering strong performances across its Healthcare, Applied Sterilization Technologies (AST) and Life Sciences segments for the past few quarters. A good solvency position continues to favor the stock. The Cantel Medical integration continues to progress seamlessly, strengthening the company’s Endoscopy offerings. However, mounting costs and stiff rivalry raise apprehension.

In the past year, shares of this Zacks Rank #3 (Hold) company have dropped 1.4% against the industry’s 25.9% decline and the S&P 500’s 13% fall.

The renowned provider of infection prevention, as well as other procedural products and services, has a market capitalization of $20.63 billion. Its earnings surpassed estimates in the trailing four quarters, the average surprise being 9.2%.

In the past five years, the company registered earnings growth of 15.9% compared with the industry’s 8.3% rise and the S&P 500’s 13.4% increase.

Zacks Investment Research
Image Source: Zacks Investment Research

Let’s delve deeper.

Factors at Play

Strong Segmental Performance: STERIS’ fiscal fourth-quarter revenues increased 38.6% year over year. Revenues at Healthcare rose 32% year over year on a 63% increase in consumable revenues, a 21% rise in service revenues and a 17% improvement in capital equipment revenues. Revenues in the AST arm rose 19% year over year.

The Life Sciences segment, too, registered revenue growth of 15% year over year on 18% growth in consumable revenues, a 13% rise in capital equipment revenues and a 14% increase in service revenues.

Progress in Healthcare and Pharmaceutical Industries: STERIS’ derives a bulk of its revenues from the healthcare and pharmaceutical industries. The company’s acquisition of Cantel Medical, a global provider of infection prevention products and services, has resulted in a strong performance in this space. In the fiscal fourth quarter, the integration of Cantel Medical continued to progress ahead of expectations. Cantel Medical’s acquisition added approximately $40 million to STERIS’ fiscal 2022 revenues, raising optimism.

The company recorded a substantial capital equipment backlog across the Healthcare segment in the reported quarter, indicating robust underlying demand for its products.

Solvency Position Promising: STERIS exited fiscal 2022 with cash and cash equivalents of $348.3 million. While total debt at the end of fiscal 2022 was $2.95 billion, much higher than the cash and cash equivalents figure, the company did not report any short-term debt on its balance sheet by quarter-end. This is good news for its solvency level, at least during the year of economic downturn when companies are majorly facing manufacturing and supply halts.

Downsides

Rising Costs: During the fiscal fourth quarter, STERIS’ SG&A expenses climbed 105.2% year over year, whereas R&D expenses rose 49% year over year. These escalating operating expenses led to an 858-basis-points contraction in the operating margin, building pressure on the bottom line.

Macroeconomic Problems: Increases in prices or decreases in the availability of raw materials and oil and gas might impair STERIS’ procurement of necessary materials for product manufacture or might increase production costs. The company anticipates additional headwinds from inflation on raw materials to continue throughout the rest of 2022.

Competitive Landscape: STERIS competes for pharmaceutical, research and industrial customers against several large and small companies. The company expects to face continued competition as new infection prevention, sterile processing, contamination control, gastrointestinal and surgical support products and services enter the market.

Estimate Trends

In the past 30 days, the Zacks Consensus Estimate for STERIS’ fiscal 2023 earnings has moved 0.1% down to $8.70.

The Zacks Consensus Estimate for fiscal 2023 revenues is pegged at $5.11 billion, suggesting 11.5% growth from the fiscal 2022 reported number.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. (AMN - Free Report) , Novo Nordisk (NVO - Free Report) and Masimo Corporation (MASI - Free Report) .

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, on average. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 12.1% against the industry’s 45.7% fall.

Novo Nordisk has a long-term earnings growth rate of 14.5%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 7.6%, on average. It currently flaunts a Zacks Rank #2 (Buy).

Novo Nordisk has outperformed its industry in the past year. NVO has gained 32% against the industry’s 16.8% growth.

Masimo has a historical earnings growth rate of 15.1%. Masimo’s earnings surpassed estimates in the trailing four quarters, the average surprise being 4.4%. It currently carries a Zacks Rank #2.

Masimo has underperformed its industry in the past year. MASI has declined 47.5% compared with the industry’s 25.9% plunge.