Favorable Market Trend & Core Business Expansion Aid STERIS

On Mar 20, 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 dilutions. However, the company operates in a tough competitive landscape, raising a concern. The stock carries a Zacks Rank #3 (Hold).

Shares of the company have outperformed the industry over the past year. The stock has surged 38.5% compared with the industry’s 25.9% rally.

 

STERIS exited third-quarter fiscal 2018 on a mixed note with earnings beating the Zacks Consensus Estimate but revenues missing the same. However, we are encouraged by the favorable underlying market trends along with new product and service offerings. The company’s organic growth was strong across specialty services, life sciences and applied sterilization segments.

We are particularly upbeat about STERIS’ series of six acquisitions in the first nine months of fiscal 2018. Through these buyouts, the company aims to strengthen the Healthcare Products, Healthcare Specialty Services and the Applied Sterilization Technologies businesses. 

Furthermore, financed by both cash in hand and credit facility borrowings, the company had to incur acquisition cost of around $51.6 million, net of cash acquired, including a contingent consideration of $5.3 million.

We think this developer, manufacturer and marketer of infection prevention, decontamination, microbial reduction and surgical and gastrointestinal support products and services can pursue back-to-back acquisitions in the long run to expand business and customer base, courtesy of its strong financial position.

We are also impressed by the company’s recent organizational changes to serve customers in a better way. Additionally, we expect this move to enhance the company’s cost structure. Further, growth in free cash flow reserve is indicative of the company’s strong cash balance. 

Meanwhile, STERIS competes for pharmaceutical, research and industrial customers against several large companies boasting extensive product portfolios and a wide global reach as well as several small companies with limited product offerings and operations in one or a few countries.

The company expects to confront intense competition as new infection prevention, sterile processing, contamination control, gastrointestinal and surgical support products and services enter the market. This might hamper STERIS’ growth considerably.

Moreover, many STERIS’ customers are undergoing consolidation, partly owing to healthcare cost-reduction measures initiated by peer pressure as well as legislators, regulators and third-party payors. We believe, if the company fails to check the customer consolidation rate right now, then it might affect its business as well as the financial standing.

Key Picks

A few better-ranked stocks in the broader medical sector are Bio-Rad Laboratories BIO, athenahealth, Inc. ATHN and PerkinElmer PKI.

Bio-Rad Laboratories sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.The company has a long-term expected earnings growth rate of 20%.

athenahealth is a Zacks #1 Ranked player. The company has a long-term expected earnings growth rate of 21.5%.

PerkinElmer has a long-term expected earnings growth rate of 12.3%. The stock carries a Zacks Rank #2 (Buy).

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