STERIS (STE) Hits a New 52-Week High: What's Driving It?

Shares of STERIS plc STE reached a new 52-week high of $176.06 on Sep 18, before closing the session marginally lower at $175.91. The stock has rallied 9.5% since its first-quarter fiscal 2021 earnings announcement on Aug 3.

The company is witnessing an upward trend in its stock price, prompted by contributions from elevated consumer demand. A broader portfolio of products and services bodes well. Further, solid performance by its Life Sciences business arm in the first quarter of fiscal 2021 despite the pandemic-led business disruptions boosted the market sentiment. However, a stiff competitive landscape and customer consolidation are concerning for the company.

Let's delve deeper.

Q1 Performance

STERIS exited first-quarter fiscal 2021 with better-than-expected results. The company witnessed solid revenue growth across its Life Sciences segment despite the coronavirus pandemic. Contributions from elevated consumer demand and a broader portfolio of products and services are encouraging. Expansion in adjusted operating margin during the quarter is also promising. An increase in free cash flow despite increased capital spending instills optimism.

Other Growth Drivers

Strong Segmental Business Amid Pandemic: In the fiscal first quarter, STERIS’ Life Sciences segment's constant currency organic revenue was driven by growth in consumable revenues, service revenues and capital equipment revenues. The segment put up a robust performance on increased demand from pharma customers focused on vaccines and biologics.

Life Sciences consumables grew year over year despite pandemic-led business disruptions. The uptick was driven partly by customers’ aim of building their inventory.

Strength in STERIS' Infection Prevention and Sterilization Wing: STERIS continues to benefit from the acquisition of Synergy Health. The consolidation, since its inception, has boosted STERIS' presence in international markets as it combines STERIS’ strong presence in North America with Synergy's solid footprint across Europe. It has also provided STERIS an opportunity to better serve the emerging markets of Asia-Pacific and Latin America.

Healthcare and Pharmaceutical Industries Hold Potential: Investors are optimistic about the growth potential of the company in the healthcare and pharmaceutical industries. With life expectancy on the rise globally, a larger aging population increases demand for medical procedures. This, in turn, translates into higher consumption of single-use medical devices and surgical kits processed by STERIS.

Downsides

Competitive Landscape: STERIS competes against several large companies that have robust 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 continued competition in the future as new products and services enter the market. Moreover, management believes STERIS’ existing or potential competitors might have greater resources than it, which might allow them to succeed in developing and commercializing products at a faster pace than STERIS. This might hamper STERIS’ growth.

Customer Consolidation: 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. Moreover, some of STERIS’ customers have reduced their production costs and subsequently their product prices to attract more customers. This, in turn, has caused greater pricing pressure and in some cases, has resulted in customer loss for the company. Additional consolidation will result in loss of a greater number of customers or create significant pricing pressure for STERIS.

Zacks Rank & Key Picks

Currently, STERIS carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the broader medical space are QIAGEN N.V. QGEN, Thermo Fisher Scientific Inc. TMO and Hologic, Inc. HOLX.

QIAGEN’s long-term earnings-growth rate is estimated at 22.3%. It currently flaunts a Zacks Rank #1. (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Thermo Fisher’s long-term earnings-growth rate is estimated at 15.5%. It currently carries a Zacks Rank #2 (Buy).

Hologic’s long-term earnings-growth rate is estimated at 16.4%. The company presently sports a Zacks Rank #1.

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