Here's Why Investors Should Retain STERIS (STE) Stock for Now
STERIS plc STE is well-poised to grow in the coming quarters, backed by its advancements in the healthcare and pharmaceutical industries. The widespread market acceptance of its diverse offerings is driving growth in the Healthcare business. The company is also solvent enough to meet its near-term debt obligations. However, macroeconomic constraints challenge STERIS’ operations, while competitive disadvantages remain a concern.
In the past year, shares of this Zacks Rank #3 (Hold) company have rallied 14% compared with the industry’s 2.5% increase and the S&P 500’s 25.3% rise.
The renowned provider of infection prevention and other procedural products and services has a market capitalization of $21.45 billion. The company has an earnings yield of 3.99% compared to the industry’s -4.75%. In the trailing four quarters, STE delivered an average earnings surprise of 1.13%.
Let’s delve deeper.
Factors at Play
Progress in Healthcare and Pharmaceutical Industries: The bulk of STERIS’ revenues is obtained from the healthcare and pharmaceutical industries. Growth in these industries is primarily driven by the aging of the global population as an increasing number of individuals are entering their prime healthcare consumption years.
Further, these industries rely upon advancements in healthcare delivery, new technologies, government policies and general economic conditions. With global life expectancy rising, a larger aging population increases the demand for medical procedures. This is driving the consumption of single-use medical devices and surgical kits processed by STERIS.
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In August 2023, the company purchased the surgical instrumentation, laparoscopic instrumentation and sterilization container assets from Becton, Dickinson and Company or BD. The acquisition strengthens, complements and expands STERIS’ Healthcare product offerings with renowned brands like V. Mueller, Snowden-Pencer and Genesis. Per the latest update, the integration is progressing as planned.
Healthcare Business Looks Promising: The Healthcare segment is gaining from the successful market adoption of its comprehensive offerings, including infection prevention consumables and capital equipment. Further, its services to maintain that equipment, repair reusable procedural instruments and outsource instrument reprocessing services are gaining traction. Continuous procedure volume growth in the United States and favorable pricing and market share gains are driving the segment’s organic growth.
In the second quarter of fiscal 2024, capital equipment, consumables and services demonstrated consistent double-digit growth. Given the performance, the company sees potential for the segment to outperform its expectations for the fiscal year, offsetting the macro challenges impacting demand in other segments.
Overall Strong Solvency Position: As of the second quarter of fiscal 2024, STERIS held cash and cash equivalents of $213.8 million and had a short-term debt obligation of $71 million. This is an indication of a strong solvent position. The long-term debt came to $3.37 billion compared to $2.86 billion at the end of the first quarter. Moreover, times interest earned of 6.2% is sequentially higher by 3.6%.
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. These macroeconomic factors also result in a significant escalation in the company’s operating expenses.
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, ease of use and overall cost-effectiveness.
The company expects to face continued competition in the future as new infection prevention, sterile processing, contamination control, and gastrointestinal and surgical support products and services enter the market.
Estimate Trends
In the past 30 days, the Zacks Consensus Estimate for STERIS’ fiscal 2024 earnings has moved down from $8.68 to $8.66.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.44 billion, suggesting 9.6% growth from the fiscal 2023 reported number.
Key Picks
Some better-ranked stocks in the broader medical space are Haemonetics HAE, DaVita DVA and HealthEquity HQY.
Haemonetics has an estimated earnings growth rate of 28.4% for fiscal 2024 compared with the industry’s 15.3%. HAE’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 16.1%. Its shares have increased 6.5% compared with the industry’s 1.7% rise 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.
DaVita, sporting a Zacks Rank #1 at present, has a long-term estimated earnings growth rate of 17.3% compared with the industry’s 11.3%. Shares of the company have increased 36.5% compared with the industry’s 10% rise over the past year.
DVA’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 36.6%. In the last reported quarter, it delivered an average earnings surprise of 48.4%.
HealthEquity, carrying a Zacks Rank #2 at present, has an estimated long-term earnings growth rate of 27.5% compared with the industry’s 13.9%. Shares of HQY have increased 12.1% against the industry’s 2.1% decline over the past year.
HQY’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 16.5%. In the last reported quarter, it delivered an average earnings surprise of 22.5%.
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DaVita Inc. (DVA) : Free Stock Analysis Report
Haemonetics Corporation (HAE) : Free Stock Analysis Report
STERIS plc (STE) : Free Stock Analysis Report
HealthEquity, Inc. (HQY) : Free Stock Analysis Report
