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STERIS: Solid Q3 Post Synergy Health Deal, Forex Woes Stay

Zacks Equity Research

On Feb 23, 2016, we issued an updated research report on Ohio-based Steris Plc STE – which manufactures and markets infection prevention, decontamination, microbial reduction, and surgical and gastrointestinal support products and services. On Nov 2, 2015, STERIS completed the much-awaited acquisition of Synergy Health plc.

Post the Synergy Health combination, STERIS delivered an impressive consolidated performance. While the bottom line comfortably exceeded the Zacks Consensus Estimate in the third quarter of fiscal 2016, the top line met the same.

The buyout is expected to boost STERIS' presence in the international markets as it will combine STERIS’ strong presence in North America with Synergy's solid footprint across Europe. It will also provide STERIS an opportunity to better serve the emerging markets of Asia-Pacific and Latin America.

The combined company is currently on track to achieve its earlier announced target of $5 million in cost savings during fiscal 2016. Management continues to expect this number to increase to about $40 million in annualized run rate savings over the next two years.

Over the recent past, STERIS has been strategically pursuing expansion into adjacent markets through acquisitions. In the first quarter of fiscal 2016, STERIS completed two important acquisitions. In mid-June 2015, the company acquired California-based Black Diamond Video, which focuses on sophisticated OR integration products combined with high-end technology needs. STERIS also acquired General Econopak (GEPCO), which manufactures consumable product solutions.

STERIS holds a strong cash balance position. Of late, the company has reduced its free cash flow outlook slightly from $155 million to $100 million, reflecting expenses related to the acquisition of Synergy Health. We believe this is indicative of the strong cash position the company hopes to establish, going forward.

On the flip side, foreign currency fluctuations continued to adversely impact STERIS’ operating results, as is the case with many other companies that record a substantial part of their revenues overseas. During the quarter, currency fluctuations adversely impacted STERIS’ revenues by $7.3 million. Per management, once the integration of Synergy Health is over, STERIS’ foreign exchange exposure on a year-over-year comparative basis will shift, causing revenues at the combined company to be more sensitive to currency fluctuations compared to the legacy STERIS.

Further, the current customer consolidation scenario will continue to adversely impact STERIS if not checked immediately. The competitive landscape and weak cost reduction initiatives also remain as overhangs.

STERIS currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

Some top-ranked stocks in the medical sector are Hill-Rom Holdings, Inc. HRC, OraSure Technologies, Inc. OSUR and Vascular Solutions Inc. VASC. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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STERIS PLC (STE): Free Stock Analysis Report
VASCULAR SOLUTN (VASC): Free Stock Analysis Report
ORASURE TECH (OSUR): Free Stock Analysis Report
HILL-ROM HLDGS (HRC): Free Stock Analysis Report
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