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

STERIS plc STE is well-poised to progress in the coming quarters, backed by the consistent recovery of healthcare procedures and the easing of supply-chain issues. However, macroeconomic constraints challenge STERIS’ operations, while competitive disadvantages are a concern.

In the past year, shares of this Zacks Rank #3 (Hold) company have rallied 25.5% compared with the industry’s 11.3% increase and the S&P 500’s 31.2% rise.

The renowned provider of infection prevention and other procedural products and services has a market capitalization of $23.09 billion. The company has an earnings yield of 3.68% compared with the industry’s -4.83%. In the trailing four quarters, STE delivered an average earnings surprise of 3.96%.

Let’s delve deeper.

Factors at Play

Promising Healthcare Business:  The Healthcare business’ constant-currency organic revenues increased 12% in the third quarter compared with the prior-year quarter’s levels. This upside can be primarily attributed to the increase in volume and favorable pricing and the addition of the surgical instrumentation assets purchased from Becton, Dickinson and Company (BD).

In the third quarter of fiscal 2024, capital equipment, consumables and services demonstrated consistent double-digit growth. The uptick was driven by procedure volume rebound in the United States and price and market share gains. Management noted that the backlog continues to normalize.

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Strong Rebound Prospects in 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.

Zacks Investment Research
Zacks Investment Research

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In terms of the latest development, during the fiscal 2024 third quarter, revenue for the AST segment increased 6% year over year. This performance reflected a 5% rise in service revenue and a 42% surge in capital equipment revenues.

Raised Guidance: The company expects fiscal 2024 revenues to increase 10-11% (previously 9-10%). Organic revenue expectation at CER stands at 7-8% (earlier 6-7%). The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.44 billion, suggesting 9.6% growth from fiscal 2023.

Adjusted EPS for fiscal 2024 are now expected in the range of $8.60-$8.70 (previously $8.60-$8.80). The Zacks Consensus Estimate for the metric is pegged at $8.66.

Downsides

Macroeconomic Problems: The current macroeconomic environment across the globe has affected STERIS’ financial operations. Governments and insurance companies continue to look for ways to contain the rising cost of healthcare. This might put pressure on players in the healthcare industry, with STERIS being no exception. Increases in prices or declines in availability of raw materials and oil and gas might impair STERIS’ procurement of necessary materials for product manufacture or might increase production costs. Also, economic and market volatility have been affecting the investment portfolio of STERIS’ legacy defined benefit pension plan. We are concerned that lingering macroeconomic softness might hamper STERIS’ growth.

Competitive Landscape: STERIS competes for pharmaceutical, research and industrial customers against several large companies that have robust product portfolios and global reach and several small companies with limited product offerings and operations in one or a few countries. In the Healthcare segment, STERIS’ notable competitors include 3M, Baxter, Boston Scientific, Belimed, Ecolab, Getinge, Go Jo, Johnson & Johnson, Kimberly-Clark, Skytron and Stryker.

Estimate Trends

In the past 30 days, the Zacks Consensus Estimate for STERIS’ fiscal 2024 earnings has moved down from $8.69 to $8.67.

The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.46 billion, suggesting 10.2% growth from the fiscal 2023 reported number.

Key Picks

Some better-ranked stocks from the broader medical space are Stryker Corporation SYK, Cencora, Inc. COR and Cardinal Health CAH.

Stryker, carrying a Zacks Rank #2, reported a fourth-quarter 2023 adjusted EPS of $3.46, beating the Zacks Consensus Estimate by 5.8%. Revenues of $5.8 billion outpaced the consensus estimate by 3.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stryker has an estimated earnings growth rate of 11.5% for 2025 compared with the S&P 500’s 9.9%. The company’s earnings surpassed estimates in each of the trailing four quarters, the average being 5.1%.

Cencora, carrying a Zacks Rank #2, reported a first-quarter fiscal 2024 adjusted EPS of $3.28, which beat the Zacks Consensus Estimate by 14.7%. Revenues of $72.3 billion outpaced the Zacks Consensus Estimate by 5.1%.

COR has an earnings yield of 5.75% compared with the industry’s 1.85%. The company’s earnings surpassed estimates in each of the trailing four quarters, the average being 6.7%.

Cardinal Health, carrying a Zacks Rank #1, reported second-quarter fiscal 2024 adjusted earnings of $1.82, which beat the Zacks Consensus Estimate by 16.7%. Revenues of $57.45 billion improved 11.6% on a year-over-year basis and also topped the Zacks Consensus Estimate by 1.1%.

CAH has a long-term estimated earnings growth rate of 15.3% compared with the industry’s 11.8% growth. The company’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 15.6%.

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Stryker Corporation (SYK) : Free Stock Analysis Report

Cardinal Health, Inc. (CAH) : Free Stock Analysis Report

Cencora, Inc. (COR) : Free Stock Analysis Report

STERIS plc (STE) : Free Stock Analysis Report

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