STERIS (STE)

Medical equipment and services company Steris (NYSE:STE). met Wall Street’s revenue expectations in Q1 CY2025, with sales up 4.3% year on year to $1.48 billion. Its non-GAAP profit of $2.74 per share was 5.4% above analysts’ consensus estimates.

Company Overview

With a mission critical role in preventing healthcare-associated infections, STERIS (NYSE:STE) provides infection prevention products, sterilization services, and medical equipment that help healthcare facilities and life science companies maintain sterile environments.

The surgical equipment and consumables industry provides tools, devices, and disposable products essential for surgeries and medical procedures. These companies therefore benefit from relatively consistent demand, driven by the ongoing need for medical interventions, recurring revenue from consumables, and long-term contracts with hospitals and healthcare providers. However, the high costs of R&D and regulatory compliance, coupled with intense competition and pricing pressures from cost-conscious customers, can constrain profitability. Over the next few years, tailwinds include aging populations, which tend to need surgical interventions at higher rates. The increasing integration of AI and robotics into surgical procedures could also create opportunities for differentiation and innovation. However, the industry faces headwinds including potential supply chain vulnerabilities, evolving regulatory requirements, and more widespread efforts to make healthcare less costly.

STERIS competes with several companies across its different segments, including 3M (NYSE:MMM), Getinge (STO:GETI-B), Ecolab (NYSE:ECL), and Sterigenics International in sterilization services. In the operating room equipment space, competitors include Stryker (NYSE:SYK) and Skytron.

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 $5.46 billion in revenue over the past 12 months, STERIS has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, STERIS’s sales grew at a solid 12.5% compounded annual growth rate over the last five years. Its growth beat the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. STERIS’s annualized revenue growth of 9.7% over the last two years is below its five-year trend, but we still think the results were respectable.

We can better understand the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 7.6% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that foreign exchange rates have boosted STERIS’s performance.

This quarter, STERIS grew its revenue by 4.3% year on year, and its $1.48 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 5.8% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is above average for the sector and indicates the market sees some success for its newer products and services.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

STERIS has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 12.9%, higher than the broader healthcare sector.

Analyzing the trend in its profitability, STERIS’s operating margin decreased by 1.8 percentage points over the last five years, but it rose by 9.8 percentage points on a two-year basis. Still, shareholders will want to see STERIS become more profitable in the future.

In Q1, STERIS generated an operating profit margin of 14.6%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

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.

STERIS’s EPS grew at a remarkable 10.6% compounded annual growth rate over the last five years. However, this performance was lower than its 12.5% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of STERIS’s earnings can give us a better understanding of its performance. As we mentioned earlier, STERIS’s operating margin was flat this quarter but declined by 1.8 percentage points over the last five years. Its share count also grew by 15.3%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, STERIS reported EPS at $2.74, up from $2.41 in the same quarter last year. This print beat analysts’ estimates by 5.4%. Over the next 12 months, Wall Street expects STERIS’s full-year EPS of $9.34 to grow 6.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

STERIS has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 11.5% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that STERIS’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

STERIS’s free cash flow clocked in at $189.9 million in Q1, equivalent to a 12.8% margin. This result was good as its margin was 1.3 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

STERIS historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.9%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

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. Fortunately, STERIS’s ROIC averaged 1.7 percentage point increases over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

STERIS reported $171.7 million of cash and $2.76 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 $1.48 billion of EBITDA over the last 12 months, we view STERIS’s 1.7× net-debt-to-EBITDA ratio as safe. We also see its $78.74 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.

It was good to see STERIS narrowly top analysts’ full-year EPS guidance expectations this quarter. We were also happy this quarter's EPS outperformed Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 3% to $234 immediately after reporting.

Updated: July 10, 2025 at 11:58 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own STERIS, you should also grasp the company’s longer-term business quality and valuation.

STERIS isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its mediocre ROIC lags the market and is a headwind for its stock price.

STERIS’s P/E ratio based on the next 12 months is 23.1x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $263.10 on the company (compared to the current share price of $230.72).