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STERIS (STE) Margin Pressure Hurts, Strategic Growth High

Zacks Equity Research

On Mar 19, we issued an updated research report on STERIS plc STE. The company has been actively trying to expand into the adjacent markets and strengthen its core business through acquisitions and divestments.

A tough competitive landscape and currency headwinds persist to pose threats to STERIS. Escalating operating expenses are putting pressure on the bottom line. Moreover, customer consolidation is a concern for the company. The stock carries a Zacks Rank #4 (Sell).

However, over the past six months, shares of STERIS have outperformed its industry. The stock has gained 9.6% versus the industry’s 3.4% decline. 

STERIS exited third-quarter fiscal 2019 on a mixed note with in-line earnings and revenues exceeding the Zacks Consensus Estimate. We are impressed by the company’s consistently strong organic growth performance across its major segments. The company is currently demonstrating strong top-line growth on the back of favorable underlying market trends along with new product and service offerings. Further, growth in free cash flow reserve is indicative of the company’s solid cash balance.

STERIS has also made certain acquisitions, divestments and organizational changes, expected to better align with its operations. The company recently announced a restructuring plan that will generate an approximately $12-million uptick in profit over the next couple of years.

Meanwhile, STERIS competes for pharmaceutical, research and industrial customers with several bigwig players boasting extensive product portfolios and a global reach. It also contends with small entities possessing limited product offerings and operations in one or across a few countries.

A fierce rivalry looming large on the company is a bother as new infection prevention, sterile processing, contamination control, gastrointestinal and surgical support products and services flood the market. This, in turn, might hinder STERIS' growth considerably.

Moreover, multiple STERIS' clients are undergoing consolidation, partly owing to healthcare cost-reduction measures, initiated by competitive pressures and legislators, regulators plus third-party payors. We presume that if the company fails to check its customer consolidation rate now, it will adversely impact its business as well as the finances.

Key Picks

Some better-ranked stocks in the broader medical space are Integer Holdings Corporation ITGR, Veeva Systems Inc. VEEV and Hologic, Inc. HOLX.

Integer Holdings projects an earnings growth rate of 31.2% for the first quarter of 2019. It currently carries a Zacks Rank #2 (Buy) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Veeva Systems’ long-term earnings growth rate is predicted at 14.8%. The stock currently holds a Zacks Rank of 2.

Hologic’s long-term earnings growth rate is forecast at 8.9%. The stock presently is a Zacks #2 Ranked player.

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Veeva Systems Inc. (VEEV) : Free Stock Analysis Report
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STERIS plc (STE) : Free Stock Analysis Report
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