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STERIS (STE): Q4 Results Strong, Currency Woes Remain

Zacks Equity Research

On May 23, we issued an updated research report on OH-based STERIS plc STE – a manufacturer and marketer of infection prevention, decontamination, microbial reduction, and surgical and gastrointestinal support products and services. The company currently carries a Zacks Rank #2 (Buy).

STERIS ended fiscal 2016 on a disappointing note, with its fourth-quarter results missing the Zacks Consensus Estimate at both the fronts. However, the company’s segmental performance buoys optimism with growth witnessed across all four segments. Moreover, even in the face of unfavorable currency and global headwinds, STERIS’ business grew both organically and through strategic acquisitions in the quarter.

In Nov 2015, STERIS closed its mega $1.9 billion deal to buy U.K.-based outsourced sterilization services provider Synergy Health plc, which topped legacy STERIS’ achievements in fiscal 2016. In the fiscal fourth quarter, Synergy Health was one of the key contributors to the double-digit revenue growth of the combined company.

In terms of cost synergies, STERIS was successful in achieving its earlier announced cost savings target of $5 million, in connection to this acquisition, during fiscal 2016. Further, management still expects to save an additional $15 million in fiscal 2017 and $20 million thereafter.

STERIS’ largest segment, Healthcare Products, posted mid-single-digit revenue growth in the fourth quarter, primarily driven by double-digit growth observed in consumables. Moreover, Healthcare Products’ backlog increased double-digit, indicating rising demand for this segment’s products. In terms of profitability, operating margin expanded at this segment owing to increased volume, favorable foreign currency and suspension of the Medical Device Excise Tax.

On the flip side, owing to certain restructuring initiatives adopted by management, the company recorded a $20 million charge. The restructuring actions are anticipated to result in annual savings of approximately $4–$6 million on in-sourcing and $5 million on restructuring in fiscal 2016. However, management fears that these efforts may not produce the full efficiencies and cost reduction benefits that it expects.

On the other hand, currency fluctuations impacted STERIS’ revenues by 1% in the fiscal fourth quarter. Moreover, the current macroeconomic turmoil in countries of the Middle East, owing to fluctuating oil prices, affected STERIS’ top line. Competitive headwinds and customer consolidation also continue to pose threats to the stock.

Other Stocks to Consider      

Other favorably ranked medical stocks include Baxter International Inc. BAX, Boston Scientific Corporation BSX and LeMaitre Vascular, Inc. LMAT. While Baxter sports a Zacks Rank #1 (Strong Buy), Boston Scientific and LeMaitre carry a Zacks Rank #2.

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