STERIS plc’s STE Healthcare business continues to benefit from robust U.S. procedure volumes, favorable pricing and market share gains. Service revenues fuel the Applied Sterilization Technologies (“AST”) segment’s growth. Moreover, sound financial health bodes well for the stock. Meanwhile, macroeconomic challenges and adverse currency impacts appear concerning for the company’s operations. 

In the past year, shares of this Zacks Rank #3 (Hold) company have advanced 10.4% against the industry’s 10.4% fall. The S&P 500 composite has risen 8.1% in the same time frame. 

The renowned provider of infection prevention and other procedural products and services has a market capitalization of $22.01 billion. The company has an earnings yield of 4.4% compared to the industry’s -3.2% yield. In the trailing four quarters, STE delivered an average earnings surprise of 0.6%. 

Let’s delve deeper.

Tailwinds for STERIS

Promising Healthcare Business: The Healthcare segment is gaining from the successful market adoption of its comprehensive offerings, including infection prevention consumables and capital equipment. Over the past few quarters, the segment’s organic growth has been driven by continuous procedure volume growth in the United States, favorable pricing and market share gains. In the third quarter of fiscal 2025, Healthcare reported revenue growth of 7% year over year. This was driven by a 9% improvement in consumable revenues and 13% growth in service revenues, with both segments posting strong organic revenue growth.

Order growth was robust as well, with more than 10% growth in the fiscal third quarter, implying a $435 million healthcare backlog. The segment’s margins also improved, primarily driven by increasing volume, favorable pricing and positive productivity offsetting labor inflation.

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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. STERIS is particularly gaining success with ethylene oxide (EO) sterilization. In the fiscal third quarter, the AST division experienced 10% reported growth year over year, led by a 10% increase in service revenues. Constant currency organic revenues were in the low double digits. STERIS experienced its first signs of increased bioprocessing demand. Meanwhile, global demand from MedTech customers was stable. The company expects bioprocessing revenues to grow in the upcoming quarters.

Favorable Solvency: As of the fiscal third quarter, STERIS had a long-term debt of $2.04 billion, down 5.6% from $2.16 billion recorded at the end of the fiscal second quarter.  The company exited the fiscal third quarter with cash and cash equivalents of $155.2 million, higher than its short-term debt of $125 million. The total debt-to-capital ratio was 25.2% at the end of the fiscal third quarter, in line with the previous quarter’s level.

Concerns Weighing on STERIS

Macroeconomic Problems: The current macroeconomic environment worldwide has adversely affected STERIS’ financial operations. Governments and insurance companies continue to look for ways to contain the rising cost of healthcare, putting significant pressure on healthcare industry players like STERIS. Increases in prices or decreases in the availability of raw materials and oil and gas have also historically impaired the company’s procurement of necessary materials for product manufacture, leading to an increase in production costs. In addition, 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.

Foreign Currency Risks: With nearly 30% of the company’s revenues and costs of revenues being generated outside the United States, foreign currency exchange rate fluctuations can significantly impact the company’s financial position, results of operations and competitive position. For most operations, local currencies have been determined to be the functional currencies. On the fiscal third-quarter earnings call, the company highlighted the unfavorable impact of currency rate changes, which impacted both revenues and profit. In line with this, STE has lowered its revenue growth rate to approximately 6% (earlier 6.5-7.5%), reflecting approximately $0.10 of impact from negative currency.

STE Stock Estimate Trend

In the past 30 days, the Zacks Consensus Estimate for STERIS’ fiscal 2025 earnings has remained constant at $9.09.

The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $5.46 billion, which suggests modest 0.3% growth from the fiscal 2024 reported number.

Key Picks

Some better-ranked stocks in the broader medical space are Masimo MASI, Boston Scientific BSX and Hims & Hers Health HIMS.

Masimo has an earnings yield of 3.4%, well ahead of the industry’s -3.2% yield. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 14.4%. Its shares have risen 11.3% against the industry’s 10.4% fall in the past year.

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

Boston Scientific, carrying a Zacks Rank #2 (Buy), has an earnings yield of 3.1% compared with the industry’s 0.4%. Shares of the company have rallied 38.7% compared with the industry’s 7% growth. BSX’s earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 8.3%.

Hims & Hers Health, carrying a Zacks Rank #2 at present, has an earnings yield of 2.5% compared with the industry’s -6.8%. Shares of the company have rallied 137.4% compared with the industry’s 1.6% growth. HIMS’ earnings surpassed estimates in three of the trailing four quarters and missed on one occasion, the average surprise being 40.4%.

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This article originally published on Zacks Investment Research (zacks.com).

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