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Here's Why Investors Should Retain STERIS (STE) Stock for Now

STERIS plc STE is well-poised for growth in the coming quarters, backed by the strong momentum in the Healthcare business. The Becton, Dickinson and Company deal will strengthen, complement and expand the company’s Healthcare product offerings. Encouraging signs of the Medtech demand recovery also buoy optimism for the AST (Applied Sterilization Technologies) business.

However, STERIS’ operations are subjected to macroeconomic pressures and currency fluctuations, which may adversely affect its performance.

In the past year, shares of this Zacks Rank #3 (Hold) company have rallied 12.3% against the industry’s 7.5% fall and the S&P 500’s 13.3% rise.

The renowned provider of infection prevention and other procedural products and services has a market capitalization of $19.78 billion. The company has an earnings yield of 4.35% compared to the industry’s -8.65%. In the trailing four quarters, STE delivered an average earnings surprise of 1.13%.

Let’s delve deeper.

Factors at Play

Upsides

Promising Healthcare Business: The Healthcare segment is gaining from the successful market adoption of its comprehensive offerings, including infection prevention consumables and capital equipment. In the second quarter of fiscal 2024, capital equipment, consumables and services demonstrated consistent double-digit growth. The backlog reduced sequentially, and replacement orders represented 65% of the total orders in Healthcare in the first half of the fiscal year.

Given the performance, the company sees potential for the segment to outperform its expectations for the fiscal year, offsetting the macro challenges impacting demand in other segments.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Strong Rebound Prospects of the AST Segment: Since the beginning of the fiscal 2023 third quarter, STERIS customers were left stranded with a bulk of inventory, possibly caused by vaccine reluctance or vaccine production in general. However, the MedTech inventory pullback was earlier noted as temporary and is not expected to continue beyond the first half of the year.

Raising optimism, the company seemingly witnessed positive signs of recovery in the MedTech demand in the fiscal second quarter.  Markets across the United States reflected an improving procedure environment and the burndown of customer inventory, resulting in solid growth. On the bioprocessing side, despite tough comparisons with a vaccine spike in the year-ago period leading to a slowdown in market demand, management remains bullish on sequential growth to return in the second half of the year.

Benefits of the BD Acquisition: In August 2023, the company purchased the surgical instrumentation, laparoscopic instrumentation and sterilization container assets from Becton, Dickinson and Company or BD. The acquisition strengthens, complements and expands STERIS’ Healthcare product offerings with renowned brands like V. Mueller, Snowden-Pencer and Genesis. Per the latest update, the integration is progressing as planned.

Downsides

Mounting Expenses May Strain the Bottom Line: Challenging macroeconomic conditions in the form of supply-chain constraints, higher material costs, ongoing labor inflation and lower productivity continue to weigh significantly on STERIS’ margins. These macroeconomic factors are also resulting in a significant escalation in the company’s operating expenses.

In the first half of fiscal 2024, the gross profit was affected by the unfavorable impacts of productivity and inflationary cost increases for materials and labor, which exceeded the benefits of pricing and mix.

Foreign Currency Risks: With nearly 30% of STERIS’ revenues and 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.

For instance, the ongoing geopolitical instability, including as a result of Russia’s invasion of Ukraine, has negatively impacted and can potentially further impact the global and U.S. economies. This has led to volatility in capital markets and foreign currency exchange rates, rising interest rates and heightened cybersecurity risks.

Estimate Trends

In the past 30 days, the Zacks Consensus Estimate for STERIS’ fiscal 2024 earnings has moved south from $8.74 to $8.70.

The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.43 billion, suggesting 9.5% growth from the fiscal 2023 reported number.

Key Picks

Some better-ranked stocks in the broader medical space are Haemonetics HAE, Insulet PODD and DexCom DXCM.

Haemonetics has an estimated earnings growth rate of 27.4% for fiscal 2024 compared with the industry’s 14.1%. HAE’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 16.1%. Its shares have increased 0.3% against the industry’s 6.3% fall in the past year.

HAE carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Insulet, sporting a Zacks Rank #1 at present, has a long-term estimated earnings growth rate of 39.2% compared with the industry’s 11.7%. Shares of the company have decreased 37.4% compared with the industry’s 6.2% decline over the past year.

PODD’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 105.1%. In the last reported quarter, it delivered an average earnings surprise of 77.5%.

DexCom, carrying a Zacks Rank #2 at present, has an estimated long-term earnings growth rate of 33.6% compared with the industry’s 13.8%. Shares of DXCM have fallen 1.9% compared with the industry’s 7.5% decline over the past year.

DXCM’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 36.4%. In the last reported quarter, it delivered an average earnings surprise of 47.1%.

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DexCom, Inc. (DXCM) : Free Stock Analysis Report

STERIS plc (STE) : Free Stock Analysis Report

Insulet Corporation (PODD) : Free Stock Analysis Report

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