Should You Own STERIS (STE) Stock Now? Here's What to Consider - July 8, 2024

STERIS SA (STE – (Free Report) is expected to benefit from growth in the pharmaceutical and healthcare sectors in the coming quarters, supported by favorable momentum as well as strategic additions. The Healthcare segment is benefiting from the positive volume environment in the United States and is gaining market share. In addition, the strong rebound prospects of Applied Sterilization Technologies (“AST”) are encouraging.

At the same time, the impacts of macroeconomic challenges and increasing consolidation in the sector are a source of concern for the stock.

Over the past year, shares of this Zacks Rank #3 (Hold) company have fallen 1.3% compared to a growth of 1.6% for the industry and a rise of 27.8% for the S&P 500.

The renowned provider of infection prevention and other procedure products and services has a market capitalization of $21.75 billion. The company has an earnings yield of 4.20%, compared to -5.82% for the industry. Over the past four quarters, STE has an average earnings surprise of 2.21%.

Let’s go deeper.

Factors at play

Progress in the health and pharmaceutical sectors: STERIS derives the majority of its revenues from the healthcare and pharmaceutical sectors, which are driven by factors such as the aging of the global population, advances in healthcare delivery, acceptance of new technologies, government policies and general economic conditions. Growing concern about hospital-acquired infections worldwide and increasing demand for medical procedures such as endoscopies and colonoscopies for more efficient healthcare operations are driving demand for STE’s products and services.

Additionally, STERIS has grown its business through strategic acquisitions such as Key Surgical in 2020, Cantel Medical in 2021 and, most recently, the surgical instrumentation, laparoscopic instrumentation and sterilization container assets of Becton, Dickinson and Company (BD) in fiscal 2023. The acquisition strengthens, complements and expands the company’s healthcare product offering with renowned brands such as V. Mueller, Snowden-Pencer and Genesis.

Optimistic forecasts for the AST segment: The company offers a broad range of sterilization modalities through a global network of more than 50 contract sterilization and laboratory facilities. During fiscal 2024, the AST division faced temporary setbacks, primarily due to inventory destocking in certain MedTech categories and lower customer demand for bioprocessing. Since the third quarter of the fiscal year, there have been positive signs of recovery in MedTech demand, particularly in the United States, driven by an improved procedural environment and reduced customer inventories.

Image Source: Zacks Investment Research

Despite modest organic growth of 3% at constant currency for the year, AST saw significant improvements in its services revenues, particularly double-digit growth in the United States. The stabilization of bioprocess demand is a positive development. However, STERIS does not expect a return to significant growth in bioprocess until the second half of fiscal 2025. In addition, the company anticipates single-digit growth in the segment, with growth accelerating in the second half of the year.

Promising company in the health sector: The Healthcare segment is benefiting from successful market adoption of its comprehensive offerings, including infection prevention consumables and capital equipment. In recent quarters, organic growth in the segment was driven by continued procedure volume growth in the U.S. and favorable pricing and market share gains.

Fiscal 2024 ended with organic revenue growth of 13% at constant currency for the Healthcare segment, its third consecutive year of double-digit growth. This success was driven by the actions of its operational teams to reduce lead times and return the order book to normal levels. In the fourth quarter, lead times returned to pre-pandemic levels for the first time in two years. In addition, the addition of BD assets boosted the segment’s operating income.

Disadvantages

Macroeconomic issues: The current global macroeconomic environment poses a challenge to STERIS’ financial operations. Governments and insurance companies continue to seek ways to contain rising healthcare costs, which is putting pressure on healthcare companies like STERIS. Increased prices or decreased availability of raw materials, oil and gas could hinder STERIS’ supply of materials needed to manufacture products or increase production costs.

In addition, economic and market volatility has impacted STERIS’ defined benefit pension plan investment portfolio. We are concerned that continued macroeconomic weakness may hamper STERIS’ growth.

Customer consolidation: A number of STERIS’ customers are consolidating, in part due to healthcare cost-cutting measures driven by competitive pressures as well as by legislators, regulators and third-party payors. In addition, some of STERIS’ customers have reduced their production costs and product prices to attract more customers, resulting in increased pricing pressure and customer loss for the company.

Recent healthcare legislation and adverse economic conditions may require further consolidation. If the Company fails to control the pace of customer consolidation now, it will have a negative impact on STERIS’s business performance and financial condition in the future.

Image estimation

Over the past 30 days, the Zacks Consensus Estimate for STERIS’s fiscal 2025 earnings has remained constant at $9.25.

The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $5.48 billion, suggesting growth of 1.4% from the fiscal 2024 reported figure.

Key choices

Some of the top-ranked stocks in the broader medical field are Health for her and him (HIM – Free report), Medical Space (MEDP – Free report) and ResMed (RMD – (Free report).

Hims & Hers Health’s earnings are expected to rise 281.8% in 2024, compared with an industry gain of 15.7%. HIMS’s earnings have topped estimates in three of the trailing four quarters and missed expectations in just one, representing an average surprise of 79.2%. Its shares have soared 141.3% compared with an industry gain of 27.1% over the past year.

HIMS is currently ranked #1 (Strong Buy) by Zacks. You can see the complete list of today’s Zacks #1 Rank stocks here.

Medpace, currently rated Zacks Rank #2 (Buy), has an estimated earnings growth rate of 27.1% in 2024, compared to 13.1% for the industry. Shares of MEDP have gained 66.4% compared to the industry’s growth of 5% over the past year.

MEDP’s earnings have topped estimates in each of the last four quarters, with an average surprise of 12.8%. In the most recently reported quarter, the surprise was 30.6%.

ResMed, which also currently holds a Zacks Rank #2, has an estimated earnings growth rate for fiscal 2024 of 19.6%, compared to the industry’s estimate of 12.9%. Shares of RMD have declined 10.1%, compared to the industry’s estimate of 1.7%, over the past year.

RMD’s earnings have exceeded expectations in three of the last four quarters and have fallen short of expectations in just one, generating an average surprise of 2.8%. In the most recently reported quarter, the surprise was 10.9%.