STERIS Focuses On Expanding Core Business, Competition Rife

On Feb 26, we issued an updated research report on STERIS plc (NYSE:STE) . The company has been actively trying to expand into adjacent markets and strengthen 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 #3 (Hold).

This developer, manufacturer and marketer of infection prevention, decontamination, microbial reduction, and surgical and gastrointestinal support products and services has outperformed the industry over the past year. The stock has gained 31.5% compared with the industry’s 16.5% rally.

STERIS exited third-quarter fiscal 2018 on a mixed note, with earnings beating the Zacks Consensus Estimate and revenues missing the same. We are encouraged by the favorable underlying market trends along with the 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’ 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 with both cash on hand and credit facility borrowings, the company had to incur acquisition cost of around $51.6 million, net of cash acquired and including potential contingent consideration of $5.3 million.

We believe STERIS can pursue back-to-back acquisitions in the long run in order to expand business and customer base, courtesy of its strong financial position.

We are also encouraged by the company’s recent organizational changes to serve customers in a better way. We also 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 that have extensive product portfolios and global reach, as well as a number of small companies with limited product offerings and operations in one or a few countries.

The company expects to face 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, a number of STERIS’ customers are undergoing consolidation, partly due to healthcare cost reduction measures initiated by competitive pressure as well as legislators, regulators and third-party payors. We believe if the company fails to check the rate of its customer consolidation now, it will adversely affect its business as well as financial condition.

Key Picks

Some better-ranked stocks in the broader medical sector are PerkinElmer (NYSE:PKI) , Bio-Rad Laboratories (NYSE:BIO) and Becton, Dickinson and Company (NYSE:BDX) .

Bio-Rad Laboratories has a Zacks Rank of 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 25%.

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

Becton, Dickinson and Company is a Zacks #2 Ranked player. The company has a long-term expected earnings growth rate of 13.3%.

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