Here's Why Investors Should Retain STERIS (STE) Stock for Now
STERIS plc STE is likely to gain in the coming quarters as the healthcare procedure continues to rebound. Management is increasingly optimistic about the impact of the Becton, Dickinson deal on the constant-currency organic performance this year. The company is solvent enough to meet its near-term debt obligations. However, STERIS’ operations are subjected to macroeconomic pressures and intense competition, which may adversely affect its performance.
In the past year, shares of this Zacks Rank #3 (Hold) company have rallied 37.1% compared with the industry’s 1.8% increase and the S&P 500’s 16.9% rise.
The renowned provider of infection prevention and other procedural products and services has a market capitalization of $22.30 billion. The company has an earnings yield of 3.87% compared to the industry’s -7.71%. In the trailing four quarters, STE delivered an average earnings surprise of 1.25%.
Let’s delve deeper.
Factors at Play
Promising Healthcare Business: The Healthcare segment is gaining from the successful market adoption of its comprehensive offerings, including infection prevention consumables and capital equipment. Continuous procedure volume growth in the United States and favorable pricing and market share gains are driving the segment’s organic growth.
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On the capital equipment side, the easing of supply-chain issues and reduced lead times have led to strong shipments in the fiscal 2024 first quarter. The company’s robust capital spending shows that nearly 40% of first-quarter orders have been made toward large projects.
Acquisition to Drive Growth: In June 2023, the company signed a definitive agreement to purchase the surgical instrumentation, laparoscopic instrumentation and sterilization container assets from Becton, Dickinson and Company or BD. The acquisition will strengthen, complement and expand STERIS’ Healthcare product offerings with the addition of renowned brands like V. Mueller, Snowden-Pencer and Genesis.
Management expects to close the BD transaction ahead of September 2023. To reflect the transaction, the company has released an updated outlook for fiscal 2024.
Overall Strong Solvency Position: At the end of the fiscal 2024 first quarter, STERIS had cash and cash equivalents of $208.6 million and long-term debt of $2.86 billion. However, the company has sufficient liquidity to meet its short-term debt obligation of $63 million. STE’s total debt-to-capital ratio stood at 32.1%, sequentially lower than 33.6% at the end of the fiscal 2023 fourth quarter.
Downsides
Mounting Expenses May Strain the Bottom Line: Challenging macroeconomic conditions in the form of supply-chain constraints, higher material costs, ongoing labor inflation and lower productivity continue to weigh significantly on STERIS’ margins. In the fiscal first quarter, the contraction in the gross margin reflected the unfavorable impacts of inflationary cost increases for materials and labor, which exceeded the benefits of pricing.
Competitive Landscape: STERIS competes for pharmaceutical, research and industrial customers against several large companies that have robust product portfolios and global reach, as well as many small companies with limited product offerings and operations in one or a few countries. STERIS’ Life Sciences segment operates in highly regulated environments where the most intense competition results from technological innovations, product performance, convenience and ease of use and overall cost-effectiveness.
The Isomedix segment operates in a highly regulated industry. It competes in North America with Sterigenics International, Inc. and other smaller contract sterilization companies and manufacturers that sterilize products in-house.
Estimate Trends
In the past 30 days, the Zacks Consensus Estimate for STERIS’ fiscal 2024 earnings has moved up from $8.72 to $8.74.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.43 billion, suggesting 13.5% growth from the fiscal 2023 reported number.
Key Picks
Some better-ranked stocks in the broader medical space are Haemonetics HAE, Intuitive Surgical ISRG and Quanterix QTRX.
Haemonetics has an estimated earnings growth rate of 26.1% in the fiscal 2024 compared with the industry’s 18.7%. HAE’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 19.39%. Its shares have rallied 18.3% against the industry’s 0.5% fall in the past year.
HAE carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Intuitive Surgical, carrying a Zacks Rank #2 at present, has a long-term estimated earnings growth rate of 15.7% compared with the industry’s 15.5%. Shares of the company have rallied 51.1% compared with the industry’s 1.8% growth over the past year.
ISRG’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 4.19%.
Quanterix, carrying a Zacks Rank #2 at present, has an estimated earnings growth rate of 62.8% for the current year compared with the industry’s 15.2%. Shares of QTRX have surged 145.6% against the industry’s 0.8% decline over the past year.
Quanterix’s earnings surpassed estimates in each of the trailing four quarters, delivering an average earnings surprise of 30.39%. In the last reported quarter, it posted an earnings surprise of 55.56%.
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Intuitive Surgical, Inc. (ISRG) : Free Stock Analysis Report
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