Sotera Health Company (SHC)

Healthcare services company Sotera Health (NASDAQ:) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 9.1% year on year to $311.3 million. Its non-GAAP profit of $0.26 per share was 19.1% above analysts’ consensus estimates.

Company Overview

With a critical role in ensuring the safety of millions of patients worldwide, Sotera Health (NASDAQGS:SHC) provides sterilization services, lab testing, and advisory services to ensure medical devices, pharmaceuticals, and food products are safe for use.

The life sciences subsector specializing in research tools and consumables enables scientific discoveries across academia, biotechnology, and pharmaceuticals. These firms supply a wide range of essential laboratory products, ensuring a recurring revenue stream through repeat purchases and replenishment. Their business models benefit from strong customer loyalty, a diversified product portfolio, and exposure to both the research and clinical markets. However, challenges include high R&D investment to maintain technological leadership, pricing pressures from budget-conscious institutions, and vulnerability to fluctuations in research funding cycles. Looking ahead, this subsector stands to benefit from tailwinds such as growing demand for tools supporting emerging fields like synthetic biology and personalized medicine. There is also a rise in automation and AI-driven solutions in laboratories that could create new opportunities to sell tools and consumables. Nevertheless, headwinds exist. These companies tend to be at the mercy of supply chain disruptions and sensitivity to macroeconomic conditions that impact funding for research initiatives.

Sotera Health's main competitor in the sterilization services market is STERIS plc's Applied Sterilization Technologies segment. In the laboratory testing space, Nelson Labs competes with various testing laboratories including Eurofins Scientific, WuXi AppTec, and SGS. For Nordion's Co-60 supply business, competitors include other nuclear reactor operators and isotope suppliers.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $1.15 billion in revenue over the past 12 months, Sotera Health Company is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Sotera Health Company’s sales grew at a decent 7.7% compounded annual growth rate over the last five years. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Sotera Health Company’s annualized revenue growth of 7.8% over the last two years aligns with its five-year trend, suggesting its demand was stable.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Sotera Health Company’s organic revenue averaged 8% year-on-year growth. Because this number aligns with its two-year revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Sotera Health Company reported year-on-year revenue growth of 9.1%, and its $311.3 million of revenue exceeded Wall Street’s estimates by 2.6%.

Looking ahead, sell-side analysts expect revenue to grow 4.9% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Sotera Health Company has been an efficient company over the last five years. It was one of the more profitable businesses in the healthcare sector, boasting an average operating margin of 27%.

Looking at the trend in its profitability, Sotera Health Company’s operating margin rose by 3.4 percentage points over the last five years, as its sales growth gave it operating leverage. This performance was mostly driven by its recent improvements as the company’s margin has increased by 6.7 percentage points on a two-year basis.

This quarter, Sotera Health Company generated an operating margin profit margin of 36.7%, up 8.5 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sotera Health Company’s EPS grew at an astounding 16.3% compounded annual growth rate over the last five years, higher than its 7.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Sotera Health Company’s earnings to better understand the drivers of its performance. As we mentioned earlier, Sotera Health Company’s operating margin expanded by 3.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Sotera Health Company reported adjusted EPS of $0.26, up from $0.17 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Sotera Health Company’s full-year EPS of $0.81 to grow 5.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Sotera Health Company has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.1%, subpar for a healthcare business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Sotera Health Company to make large cash investments in working capital and capital expenditures.

Taking a step back, we can see that Sotera Health Company’s margin dropped by 9.7 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Sotera Health Company’s free cash flow clocked in at $34.98 million in Q3, equivalent to a 11.2% margin. The company’s cash profitability regressed as it was 10.2 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Sotera Health Company’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 7.5%, slightly better than typical healthcare business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sotera Health Company’s ROIC averaged 1.7 percentage point increases each year. This is a good sign, and we hope the company can keep improving.

Sotera Health Company reported $301 million of cash and $2.13 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $589.7 million of EBITDA over the last 12 months, we view Sotera Health Company’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $83.34 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Sotera Health Company blew past analysts’ full-year EPS guidance expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Looking ahead, the company raised full-year revenue guidance. Zooming out, we think this was a solid print. The stock traded up 2.2% to $17 immediately after reporting.

Updated: December 3, 2025 at 10:01 PM EST

Before investing in or passing on Sotera Health Company, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Sotera Health Company isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its subscale operations give it fewer distribution channels than its larger rivals. And while the company’s impressive operating margins show it has a highly efficient business model, the downside is its cash profitability fell over the last five years.

Sotera Health Company’s P/E ratio based on the next 12 months is 18.4x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $18.93 on the company (compared to the current share price of $16.65).