Yahoo Finance Here's Why You Should Retain STERIS (STE) Stock for Now
STERIS plc STE is likely to grow in the coming quarters, backed by the promising recovery potential in the AST (Applied Sterilization Technologies) segment. The company also benefits from the growing healthcare and pharmaceutical sectors, fueled by an aging population and strategic acquisitions like the BD assets purchase. Strong solvency buoys optimism.
Meanwhile, headwinds such as foreign currency risks and macroeconomic challenges raise worry for the stock.
In the past year, shares of this Zacks Rank #3 (Hold) company have increased 9.3% compared with the industry’s 1.8% growth and the S&P 500’s 24% rise.
The renowned provider of infection prevention and other procedural products and services has a market capitalization of $20.21 billion. The company has an earnings yield of 4.63% compared to the industry’s -5.11%. In the trailing four quarters, STE delivered an average earnings surprise of 3.96%.
Let’s delve deeper.
Factors at Play
Strong Rebound Prospects of the AST Segment: This technology-neutral contract sterilization service successfully offers a wide range of sterilization modalities through a worldwide network of more than 50 contract sterilization and laboratory facilities. STERIS, particularly, is gaining success with ethylene oxide (EO) sterilization. STERIS’ customers in this business are mostly the manufacturers of single-use, sterile technologies that are used in aseptic manufacturing of vaccines and biopharmaceuticals.
During the third quarter of fiscal 2024, revenues for the AST segment increased 6% year over year. This performance reflected 5% growth in service revenues and 42% growth in capital equipment revenues. Earlier, management noted that MedTech inventory destocking is temporary and is not expected to continue beyond the first half of 2024.
In the fiscal third quarter, the company seemingly witnessed positive signs of recovery in the MedTech demand. The markets across the United States reflected an improving procedure environment and the burndown of customer inventory, resulting in good growth.
Progress in Healthcare and Pharmaceutical Industries: STERIS generates the majority of its revenues from the healthcare and pharmaceutical sectors. Growth in these industries is driven by the aging global population as an increasing number of individuals are entering their prime healthcare consumption years.
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Factors such as advancements in healthcare delivery, technological acceptance, government policies and economic conditions also play a role. With life expectancy on the rise globally, a larger aging population increases the demand for medical procedures. This translates into higher consumption of single-use medical devices and surgical kits processed by STERIS.
In August 2023, the company purchased the surgical instrumentation, laparoscopic instrumentation and sterilization container assets from Becton, Dickinson and Company or BD, enhancing its Healthcare product offerings. This acquisition positively impacted the company's Healthcare segment operating income in the fiscal third quarter.
Overall Solid Solvency Position: STERIS ended the third quarter of fiscal 2024 with $195.6 million in cash and cash equivalents and a near-term payable debt of $78 million. Long-term debt decreased to $3.23 billion from $3.36 billion at the end of the fiscal second quarter. While the times interest earned ratio declined to 5.9% in the third quarter, the total debt-to-capital ratio improved to 34% from 35.7% in the second quarter of fiscal 2024.
Downsides
Foreign Currency Risks: STERIS’ business is exposed to the impact of foreign currency exchange fluctuations. With nearly 30% of the company’s revenues and 30% of the cost of revenues being generated outside the United States, foreign currency exchange rate fluctuations can significantly impact its financial position, results of operations and competitive position. Geopolitical instability, such as Russia's invasion of Ukraine, has worsened this risk, leading to volatility in capital markets and foreign exchange rates. In fiscal 2023, currency fluctuations negatively impacted STE's revenues by approximately $109.4 million.
Macroeconomic Problems: The challenging global macroeconomic conditions are impacting the company’s financial performance. Governments and insurance companies are seeking ways to control healthcare costs, which could affect healthcare players like STERIS. Increases in raw material prices or supply chain disruptions could hinder production or increase production costs.
In addition, economic and market volatility have been affecting the investment portfolio of STERIS’ legacy defined benefit pension plan. These factors are driving up the company's operating expenses and could slow its growth. The company’s overall adjusted operating expenses increased 16.9% year over year in the third quarter.
Estimate Trends
In the past 30 days, the Zacks Consensus Estimate for STERIS’ fiscal 2024 earnings has remained constant at $8.67.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.47 billion, which suggests 10.4% growth from the fiscal 2023 reported number.
Key Picks
Some better-ranked stocks in the broader medical space are Inspire Medical System INSP, HCA Healthcare HCA and Boston Scientific BSX.
Inspire Medical System has an estimated 2024 earnings growth rate of 51.4% compared with the industry’s 20.3%. INSP’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 353.55%. Its shares have decreased 11.4% compared with the industry’s 23.6% fall in the past year.
INSP sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
HCA Healthcare, carrying a Zacks Rank #2 (Buy) at present, has an estimated long-term earnings growth rate of 10.1% compared to the industry’s 9.9%. Shares of the company have increased 11.2% compared with the industry’s 23.9% rise over the past year.
HCA’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 5.64%. In the last reported quarter, it delivered an average earnings surprise of 6.99%.
Boston Scientific, carrying a Zacks Rank #2 at present, has an estimated long-term earnings growth rate of 12.5% compared with the industry’s 10.9%. BSX shares have increased 37% against the industry’s 4% fall over the past year.
BSX’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 7.49%. In the last reported quarter, it delivered an average earnings surprise of 9.8%.
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