Market Share Gains In Healthcare Segment Will Positively Impact Future Opportunities

Key Takeaways

• Strong order and revenue growth in the Healthcare segment, supported by increased procedure volumes and pricing, suggests robust future performance.
  
• Effective debt management strengthens financial health, potentially lowering interest expenses and boosting earnings.
  
• Legal expenses, currency fluctuations, and rising costs could squeeze margins and threaten the company's profitability if these issues persist.

Catalysts

Provides infection prevention products and services worldwide.

• STERIS is seeing strong recurring revenue streams in the Healthcare segment, driven by increased procedure volumes, pricing, and market share gains, which are expected to positively impact future revenue growth.
  
• The company is experiencing significant order growth, particularly in the Healthcare segment, with orders growing over 10% in the third quarter, suggesting a robust backlog that should support revenue growth as these orders are fulfilled.
  
• Bioprocessing demand is outpacing expectations, particularly in the AST segment, indicating a potential tailwind for revenue growth as inventory challenges are resolved and more normalized growth is anticipated.
  
• The Life Sciences segment is showing strong growth in consumables and services, benefiting from favorable mix and pricing, which could improve net margins and sustain revenue growth despite a decline in capital equipment revenue.
  
• STERIS has continued to pay down debt, and the company's total debt-to-EBITDA ratio is approximately 1.5x, indicating strong financial health that could enhance earnings by reducing interest expenses.

STERIS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STERIS's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.4% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $880.1 million (and earnings per share of $8.84) by about April 2028, up from $616.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.5x on those 2028 earnings, down from 35.5x today. This future PE is greater than the current PE for the US Medical Equipment industry at 29.5x.
• Analysts expect the number of shares outstanding to decline by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

STERIS Future Earnings Per Share Growth

Risks

• The healthcare capital equipment revenue declined by 5% due to delayed shipments, which, if sustained, could impact future revenue by delaying cash flow and potentially causing a backlog in production.
  
• The ongoing litigation related to the ethylene oxide trial has resulted in significant expenses, and future legal costs remain uncertain. This could continue to impact net margins and overall earnings adversely.
  
• The impact of negative currency changes has affected the company's revenue and profit projections, which might further impact financial performance if the currency continues to fluctuate unfavorably.
  
• Increased labor and healthcare benefit costs could reduce net margins if not sufficiently offset by price increases or productivity improvements.
  
• Potential reinstatement of tariffs with regions like Canada and Mexico could increase cost of goods sold if imposed, affecting profitability and net income margins.

Valuation

• The analysts have a consensus price target of $250.111 for STERIS based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.5 billion, earnings will come to $880.1 million, and it would be trading on a PE ratio of 33.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of $222.77, the analyst price target of $250.11 is 10.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.