Strong Demand In Healthcare And Bioprocessing Will Drive Future Success Amid Challenges

Key Takeaways

• Strong growth in recurring healthcare revenue, alongside bioprocessing demand, is expected to drive overall revenue despite capital equipment challenges.
  
• Favorable product mix and strategic acquisitions are set to boost margins and earnings, with a robust healthcare backlog supporting future revenue.
  
• Shipment timing disruptions and increased costs could negatively impact revenue and margins, while litigation and execution risks add financial uncertainty for fiscal 2025.

Catalysts

Provides infection prevention products and services worldwide.

• STERIS anticipates strong growth in recurring revenue streams within their Healthcare segment, driven by increased procedure volumes, pricing, and market share gains. This is expected to support future revenue despite challenges in capital equipment sales.
  
• The company expects improved demand in bioprocessing in the AST segment in the latter half of the fiscal year, which should positively impact revenue growth.
  
• STERIS is experiencing growth in their Life Sciences consumables business, benefiting from favorable product mix and pricing. This is expected to positively impact margins and earnings.
  
• Despite lower expectations for capital equipment revenue, the strong healthcare backlog indicates potential for future revenue recognition as order fulfillment progresses.
  
• Management is optimistic about opportunistic M&A with a robust pipeline, potentially leading to growth through strategic acquisitions, which could enhance revenue and earnings.

STERIS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STERIS's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $874.3 million (and earnings per share of $8.82) by about December 2027, up from $591.4 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 34.3x on those 2027 earnings, down from 35.0x today. This future PE is lower than the current PE for the US Medical Equipment industry at 36.0x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

STERIS Future Earnings Per Share Growth

Risks

• Decline in healthcare capital equipment revenue due to shipment timing disruptions and weather-related delays could negatively impact overall revenue and profit expectations for fiscal 2025.
  
• Increased labor and energy costs in AST have pressured margins, and despite expectations for future improvement, these factors could continue to impact net margins negatively.
  
• Flat margins projected for fiscal 2025 raise concerns about profitability growth, especially in the AST segment, which is not meeting double-digit growth expectations.
  
• Litigation related to the Waukegan facility poses potential financial risks and uncertainties, which could affect net income if settlements or judgments are unfavorable.
  
• Delays in achieving anticipated growth in AST, particularly in medtech and bioprocessing sectors, highlight execution risks, potentially impacting revenue and overall earnings growth aspirations.

Valuation

• The analysts have a consensus price target of $249.39 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 2027, revenues will be $6.4 billion, earnings will come to $874.3 million, and it would be trading on a PE ratio of 34.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of $209.51, the analyst's price target of $249.39 is 16.0% 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.