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Here's Why You Should Hold on to STERIS (STE) Stock for Now

·5 min read

STERIS plc STE has been gaining from its strong segmental performance for the past few quarters. Robust demand for the company’s products buoys optimism. Meanwhile, revenue contributions from the Key Surgical and Cantel Medical buyouts in third-quarter fiscal 2022 appear promising. A strong solvency position bodes well for the company. However, stiff competition and persistent macroeconomic woes raise apprehension.

Over the past year, shares of this Zacks Rank #3 (Hold) company have gained 28.7% against the industry’s 11% drop. The S&P 500 rose 12.2% in the same period.

The renowned provider of infection prevention, as well as other procedural products and services, has a market capitalization of $22.63 billion. Its earnings for the third quarter of fiscal 2022 surpassed the Zacks Consensus Estimate by 8.7%.

Over the past five years, the company registered earnings growth of 12.7%, ahead of the industry’s 4.8% rise and the S&P 500’s 2.8% increase. The company projects 11.9% growth for the next year, this compares with the industry’s growth projection of 19.2% and the S&P 500’s growth expectation of 9.9% for the next year.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Let’s delve deeper.

Factors at Play

Q3 Upsides: STERIS exited the third quarter of fiscal 2022 with better-than-expected earnings. Year-over-year growth in revenues and earnings appears promising. The seamless integration process of Cantel Medical, ahead of expectations, buoys optimism for the stock. In the quarter, the company saw significant revenues from acquisitions of Key Surgical and Cantel Medical. Further, a substantial capital equipment backlog across the Life Sciences and Healthcare segments is indicative of robust underlying demand for STERIS’ products.

Strong Segmental Performance: We are upbeat about the robust performance across three of STERIS’ reporting segments in the third quarter of fiscal 2022. In the quarter, revenues at Healthcare rose 45.6% year over year (up 5% on a CER organic basis). Revenues at the Applied Sterilization Technologies segment improved 22.6% year over year (up 18% on a CER organic basis). Meanwhile, revenues at the Life Sciences segment rose 15.4% year over year (up 9% on a CER organic basis).

Strong Solvency: STERIS exited the third quarter of fiscal 2022 with cash and cash equivalents of $359.1 million. Meanwhile, total debt at the end of the fiscal third quarter was $3.3 billion, much higher than the cash and cash equivalent level. However, if we go by the company's near-term payable debt level of $128 million, it is pretty low compared to cash in hand. This is good news for its solvency level, at least during the pandemic, when companies are majorly facing manufacturing and supply halts.


Escalating Expenses: In the third quarter of fiscal 2022, STERIS’ 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 contraction in the operating margin, building pressure on the bottom line.

Macroeconomic Problems: The current macroeconomic environment across the globe has affected STERIS’ financial operations. The ongoing currency fluctuations have been partially hampering STERIS’ revenues. The company anticipates additional headwinds from inflation on raw materials throughout the rest of the year.

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

Estimate Trends

In the past 90 days, the Zacks Consensus Estimate for STERIS’ earnings has moved 1.8% north to $7.84.

The Zacks Consensus Estimate for fiscal 2022 revenues is pegged at $4.55 billion, suggesting 46.6% growth from the year-ago quarter’s reported number.

Key Picks

A few better-ranked stocks in the broader medical space are Owens & Minor, Inc. OMI, West Pharmaceutical Services, Inc. WST and HealthEquity, Inc. HQY, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Owens & Minor has a long-term earnings growth rate of 23.6%. Owens & Minor’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 32.4%, on average.

Owens & Minor has outperformed the industry over the past year. OMI has gained 47.9% against an 19.5% industry decline in the said period.

West Pharmaceutical has a long-term earnings growth rate of 27.6%. West Pharmaceutical surpassed earnings estimates in the trailing four quarters, delivering an average surprise of 29.4%.

West Pharmaceutical has gained 35.6% compared with the industry’s 6.3% rise over the past year.

HealthEquity has a long-term earnings growth rate of 16.5%. HealthEquity’s earnings surpassed estimates in the trailing four quarters, delivering an average surprise of 9.8%.

HealthEquity has declined 34% against the industry’s 59.8% slump over the past year.

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STERIS plc (STE) : Free Stock Analysis Report

HealthEquity, Inc. (HQY) : Free Stock Analysis Report

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