STERIS (STE) Benefits From Core Business Expansion, Buyouts

On Jun 5, we issued an updated research report on STERIS plc (NYSE: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, which is a concern. The stock carries a Zacks Rank #2 (Buy).

Shares of this developer, manufacturer and marketer of infection prevention, decontamination, microbial reduction plus surgical and gastrointestinal support products and services have outperformed the industry over the past three months. The stock has rallied 13.4% against its industry’s 13.1% decline.

We are encouraged by STERIS witnessing favorable underlying market trends along with new product and service offerings. The company's strong organic growth across specialty services, life sciences and applied sterilization segments also buoys optimism. Further, growth in free cash flow reserve is indicative of the company’s strong cash balance. The company has also made certain divestments and organizational changes, expected to better align with its operations.

Over the recent past, STERIS has been pursuing growth of its footprint into adjacent markets via acquisitions and dilutions. Following the Synergy Health buyout, the company sold the Synergy Health Healthcare Consumable Solutions (HCS) business to Vernacare in November 2017. The HCS business used to generate roughly $40.0 million of annual revenues.

This apart, the company made six consolidations in fiscal 2018. Through these transactions, the company aims at strengthening the Healthcare Products, Healthcare Specialty Services and the Applied Sterilization Technologies businesses.

We believe that STERIS can chase back-to-back acquisitions in the long run in order to widen its business and customer base, courtesy of its solid financial position.

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

The company worries over facing fierce 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, multiple STERIS’ clients are undergoing consolidation, partly due to healthcare cost-reduction measures, initiated by competitive pressures as well as legislators, regulators and third-party payors. We think that if the company fails to check its customer consolidation rate now, it will adversely impact its business as well as the financial condition.

Other Key Picks

A few other top-ranked stocks in the broader medical sector are Intuitive Surgical (NASDAQ:ISRG) , Illumina, Inc (NASDAQ:ILMN) and Varian Medical Systems, Inc. (NYSE:VAR) . While Intuitive Surgical and Illumina sport a Zacks Rank #1 (Strong Buy), Varian Medical carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical has an expected long-term earnings growth rate of 12.1%.

Illumina expects long-term earnings growth of 20%.

Varian Medical’s expected earnings growth rate is pegged at 25% for the current year.

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