When it comes to the nitty-gritty of cleaning, no one beats Steris. After a recent pullback, its stock looks like a buy.
...Hospitals remain hypervigilant in their disinfecting regimes, and Steris provides them with products to help them do so.
Courtesy of Steris
When it comes to the nitty-gritty of cleaning, no one beats Steris . After a recent pullback, its stock looks like a buy.
Keeping clean and killing germs has dominated everyone’s lives for the past few years, even if most of us have cut back on the number of Clorox wipes we use to, say, sanitize our groceries. Hospitals, though, remain hypervigilant in their disinfecting regimes—no one will operate in a dirty room with a dull scalpel, particularly as hospitals are often ground zero for so-called antibiotic-resistant superbugs—and Steris (ticker: STE), a medical-equipment company specializing in sterilization and related products, is among the providers of choice.
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If there’s a complaint about Steris, it’s that the stock is too expensive. At 22.3 times 12-month forward earnings, shares are four points higher than the S&P 500 index’s 18.3 times. That’s a price worth paying, however, for a company that is getting a boost as hospital procedures revert to their pre-Covid levels and supply chains return to normal, and one that also gets a large portion of its sales from recurring revenue because hospitals always need sterilization chemicals and disinfectants.
“It can be as simple as having its cleaning products in a hospital or research lab, and once those are put in place, Steris just keeps selling the soap suds,” says Sandy Villere III, a portfolio manager at wealth management firm Villere & Co. “It’s a nice place to hide in choppy waters.”
For such a stable company, the stock has taken investors on a wild ride of late. Shares took a hit in February when it lowered its full-year revenue guidance. In that case, the bad news was largely due to ongoing supply-chain woes that prevented the company from delivering key equipment, rather than any systematic internal problems or pullback from its clients.
Its resilience was on display when Steris delivered robust fiscal fourth-quarter results in mid-May, which included better-than-expected top- and bottom-line results, along with a forecast for fiscal 2024 that looks appealingly conservative.
The stock is down about 5% since that earnings jump in May, even though it’s expected to deliver earnings per share of $8.66, up more than 5% year over year, for fiscal 2024, which began in April. Analysts expect revenue to climb more than 7%, to $5.33 billion.
Both would be record highs for the company, which has notched a double-digit average compound annual growth rate for its top and bottom lines over the past five years. That’s thanks not only to recurring revenue but also to the stability of Steris’ pricing—the relatively small portion of overall healthcare costs that sterilization represents isn’t often a target of cost-cutting measures.
“Companies like the Strykers [SYK], Zimmer Biomet Holdings [ZBH], and Johnson & Johnsons [JNJ] of the world have been seeing negative pricing trends year over year,” says Williams Jones Wealth Management research analyst Joseph Ghio. “This is one of the only companies in the surgical space that can get [higher] pricing.”
That higher pricing should also boost profits. Steris raised prices by 3.3% last quarter, according to Morgan Stanley analyst Patrick Wood, as the company tried to keep pace with inflation. Now, there’s a possibility that earnings could get a boost if costs were to start falling and synergies from its acquisition of infection-prevention products maker Cantel continue—what Wood identifies as the “bull case” for the stock.
A Morgan Stanley survey also suggests that hospitals are able to do more procedures as problems with staffing recede. “All of the above is encouraging for [Steris], and we think the company has an excellent track record of capital allocation and [a] strong management team,” Wood writes. “Regardless, much of this is captured already in valuation.”
Not everyone agrees. The stock trades 2.7 points below its five-year average of 25 times earnings. And simply getting back to its five-year average of 17 times 2024 estimated earnings before interest, taxes, depreciation, and amortization, or Ebitda, would put the stock at $240, up 20% above a recent price of about $200. That’s also the price target at Stephens, where analyst Jacob Johnson highlights the stock as an attractive “growth at a reasonable price” name.
Other factors should help Steris sustain its valuation. Although it is the largest player in the U.S. medical sterilization and services market, it still sports a market capitalization of only $20 billion, a fraction of the size of healthcare behemoths like J&J. Just the possibility that it could be a takeover target, though there is no talk of that, should help prop up the stock.
The company also recently announced a new, $500 million share-repurchase program. That’s typically welcome news for investors, but Williams Jones’ Ghio believes that it’s even more significant, given that this is the “first time in Steris’ history” that it has launched an opportunistic buyback. That is, it’s buying the stock because it sees value, rather than just to offset shareholder dilution, as it has done in the past.
Steris might not be the most exciting stock, but keeping hospitals clean can keep your portfolio healthy.
Write to Teresa Rivas at teresa.rivas@barrons.com