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Here's Why You Should Add STERIS (STE) to Your Portfolio Now

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·5 min read
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STERIS plc STE is well-poised for growth in the coming quarters, backed by solid revenue growth across three of its reporting segments. The company ended first-quarter fiscal 2022 with better-than-expected results. The closing of the Cantel Medical acquisition deal instills optimism. A good solvency position also bodes well for the stock. However, escalating expenses and stiff competition are concerning.

Over the past year, shares of this Zacks Rank #2 (Buy) company have gained 37.9% compared with the industry’s 18.9% rise. The S&P 500 rose 33.9% in the same period.

The renowned provider of infection prevention as well as other procedural products and services has a market capitalization of $21.73 billion. Its earnings for the first quarter of fiscal 2022 surpassed the Zacks Consensus Estimate by 17.3%.

Over the past five years, the company registered earnings growth of 12.7%, ahead of the industry’s 2.6% rise and the S&P 500’s 2.8% increase. The company projects 12.6% growth for the next year, this compares with the industry’s growth projection of 22.7% and the S&P 500’s growth expectation of 13.08% for the next year.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Let’s delve deeper.

Factors at Play

Q1 Upsides: STERIS exited first-quarter fiscal 2022 with better-than-expected earnings and revenues. Year-over-year growth in revenues and earnings looks encouraging. Solid revenue growth across three of its reporting segments contributed to the top line. Elevated demand from medical device customers drove CER organic revenue growth in the Applied Sterilization Technologies (AST) segment. Ongoing integration efforts for Cantel Medical buoy optimism. An expansion in the gross margin is another upside. The company’s raised guidance for fiscal 2022 indicates that the bullish trend will continue.

Strong Segmental Performance: We are upbeat about STERIS’ solid performance across all its reporting segments in the first quarter of fiscal 2022. In the quarter, revenues at the Healthcare segment rose 50.8% year over year (up 25% on a CER organic basis). Revenues at the AST segment improved 37.1% on a reported basis and 27% on a CER organic basis. Meanwhile, revenues at the Life Sciences segment rose 3.9% year over year. Further, one month of financial performance of the Dental segment, which reported revenues of $35.2 million, looks promising.

Progress in Healthcare and Pharmaceutical Industries: The bulk of STERIS’ revenues are obtained from the healthcare and pharmaceutical industries. We are optimistic about the conclusion of the Cantel Medical acquisition deal in June, which was initiated in January 2021. The integration of Cantel Medical’s business is expected to strengthen and expand STERIS’ Endoscopy offerings, adding a full suite of high-level disinfection consumables, capital equipment and services, and additional single-use accessories. In November, STERIS acquired Key Surgical, which strengthens, complements and expands the company’s product offerings and global reach.

Strong Solvency: STERIS exited first-quarter fiscal 2022 with cash and cash equivalents of $534.8 million compared with $220.5 million at the end of fiscal 2021. Meanwhile, the quarter’s total debt of $3.63 billion was much higher than the corresponding cash and cash equivalent level. The company’s current-year payable debt on its balance sheet is at $373 million. This is good news in terms of its solvency level, at least amid the coronavirus pandemic when companies are majorly facing manufacturing and supply halts. This implies that STERIS is holding sufficient cash for debt repayment in the short run.


Rising Operating Costs: Escalating operating expenses are building pressure on the bottom line for STERIS. In this regard, selling, general and administrative expenses rose 153.8% year over year, whereas research and development expenses climbed 12.1% year over year in first-quarter fiscal 2022.The 1586-bps contraction in operating margin during the quarter is concerning.

Competitive Landscape: STERIS faces significant competition from notable players like 3M, Belimed, Ecolab and others in the Healthcare industry. STERIS’ Life Sciences segment operates in a highly regulated environment, wherein the most intense competition results from technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. Competitors from the pharmaceutical industry include Fedegari, Getinge, among others. The company expects to face continued competition in the future as infection prevention, sterile processing, contamination control, and gastrointestinal and surgical-support products and services enter the market.

Estimate Trends

STERIS is witnessing a positive estimate revision trend for the current year. In the past 90 days, the Zacks Consensus Estimate for earnings has moved 2.7% north to $7.70.

The Zacks Consensus Estimate for second-quarter fiscal 2022 revenues is pegged at $1.16 billion, suggesting 53.58% growth from the year-ago quarter’s reported number.

Other Key Picks

A few other top-ranked stocks from the Medical-Instruments industry are Intuitive Surgical, Inc. ISRG, Semler Scientific Inc. SMLR and IDEXX Laboratories, Inc. IDXX, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical has a long-term earnings growth rate of 9.7%.

Semler Scientific has a long-term earnings growth rate of 25%.

IDEXX has a long-term earnings growth rate of 19.9%.

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Intuitive Surgical, Inc. (ISRG) : Free Stock Analysis Report

IDEXX Laboratories, Inc. (IDXX) : Free Stock Analysis Report

STERIS plc (STE) : Free Stock Analysis Report

Semler Scientific Inc. (SMLR) : Free Stock Analysis Report

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