Medical equipment and sterilization firm Steris (NYSE:STE) probably won’t appear on a list of the hottest, fastest-growing stocks. Operating in the reliable and stable medical industry, though, equipment companies like Steris can be good choices for investors with long horizons and buy-and-hold strategies.
With a presence in everything from endoscopy equipment to surgical sterilization, Steris may be an underrated pick-and-shovel play on large parts of the medical world.
Good History of Profitability and Solid Margins
Steris has proven its ability to remain profitable under virtually all market conditions. Since 2010, the company has lost money in just four quarters.
Over the last year, the company’s earnings per share have stabilized after a period of lower performance. The trailing 12-month earnings per share for Steris stands now at $5.53.
Though far from enormous, Steris’ margins are also another appealing aspect of the business. Over the last year, the company has maintained an average net margin of 10.5%.
While its return on assets is slightly low at 7.6%, it’s worth noting that the company boasts a respectable 17.8% return on net tangible assets.
More Growth On the Horizon?
Steris is likely to benefit from continued growth in the surgical and medical markets, not least because the sterilization equipment market is expected to grow at a rate of 9.7% annually through 2030 as facilities spend more to reduce hospital-acquired infections.The surgical equipment market, meanwhile, is projected to grow at 8.4% a year over the same period.
These trends should be good news for Steris shareholders. Over the next five years, analysts expect a compounded earnings growth rate of around 10%.
Assuming the company can hit this stable, sustainable growth target, there is a good chance that rising earnings will put gradual upward pressure on share prices and reward investors with respectable returns.
Looking at the most recent quarterly report, Steris appears to be doing well in the current market environment. Revenue for the quarter rose 12% to $1.3 billion, while net cash flow rose by over $90 million compared to the year-ago period.
Earnings per share were $1.16 against a loss of $3.15 in the same quarter the previous year. Though the loss seems large, it’s worth noting that it was the result of a one-time impairment charge that has not affected STE’s earnings since.
STE May Be a Dividend Growth Opportunity
At first glance, Steris’ dividend isn’t especially attractive. The stock yields 0.9% and pays out $2.08 per share each year.
At 19 years, the company’s history of dividend raises is respectable but a far cry from the dividend aristocrats and kings that normally excite income investors.
What could make up for this, however, is the company’s relatively aggressive pace of dividend growth. Over the last 10 years, the company has raised its dividend at an average annualized rate of 9.8%.
The company’s dividend payout ratio is also still fairly low at 37.6%, which not only makes the current dividend quite safe but also gives management plenty of room for future distribution increases.
Steris Has Solid Growth Prospects
With earnings expected to grow and a favorable market environment, Steris is likely to turn in a decent financial performance over the next few years. The question, though, is whether the stock is trading at the right price.
At the moment, STE trades at 4.2x sales and 25.8x forward earnings. These ratios are both a bit high but are somewhat offset by the much lower price-to-cash-flow ratio of 11.9x.
Looking at analyst forecasts, the median 12-month target price of $242.50 per share is about 9% above the most recent trading price of $222.54.
Overall, Steris seems more or less fairly valued, potentially leaving limited room for value investors.
Does Steris Have a Competitive Moat?
With limited room for brand loyalty, medical device manufacturers rarely establish competitive advantages in the way that consumer-oriented companies can. Steris, however, commands a share of its market that gives it a similar competitive edge.
In medical device cleaning, for instance, Steris is estimated to have a market share in excess of 30%. While this doesn’t completely prevent competitive pressure, it would likely be quite difficult for another company to squeeze it out of its dominant position.
What Are the Risks?
Steris appears to be a very solid company, and future earnings growth is quite likely to produce gradually higher share prices. But with earnings only expected to grow by about 10%, the stock could underperform the broader market in the short run.
Given that it is already trading near fair value, investors who buy STE could see somewhat low comparative returns.
Steris also significantly increased its debt loads in 2021 and 2022. Though the company appears to have stopped this higher borrowing rate for the time being, long-term debt has more than tripled since 2020.
The company’s debt-to-equity ratio is still a manageable 0.5, but the balance sheet could be a source of future woes if borrowing stresses push anchor progress.
Is Steris Stock a Buy?
According to six analysts, Steris stock is a buy with 9.6% upside to fair value of $238.33 per share.
With its roughly fair valuation and moderate projected growth, STE likely won’t find too much appeal with pure value or high-growth investors. Nonetheless, the stock may still be suitable for conservative investors seeking a slower, steadier approach to long-term returns.
Steris also holds a decent amount of appeal for dividend growth investors, as its high historical dividend growth rate and low payout ratio could both indicate that management is prioritizing returning cash to shareholders.
Overall, Steris looks to be a moderate buy for certain types of investors. Here, it’s interesting to note the 93% institutional ownership level of STE shares, suggesting Wall Street is quite bullish on the company’s long-term potential.
Combined with favorable price forecasts from professional analysts, it appears that the smart money is firmly behind Steris at the moment.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.