EUR 850.00 For Business Accounts Only

Morningstar | 1Q Results Position Steris to Meet Our Full-Year Outlook; Raising FVE

Steris posted strong first-quarter results that were in line with our forecasts. We'll likely raise our fair value estimate by a mid-single-digit percentage for the narrow-moat company as we account for the cash flows received since our last update, but we don't intend to make any major changes to our model.

The negative market reaction is probably attributable to the company's reported miss on operating profit, although the bottom line benefited from a more favorable tax rate. Elevated expenses were reflected in both selling, general, and administrative and research and development as management works to deepen its development initiative in the healthcare products franchise, and startup costs related to outsourced reprocessing services become more visible. We think the decision to increase spending is prudent, as management deems internal reinvestment its highest-return capital deployment activity, and adjusted operating margin was still able to expand 40 basis points over last year.

All of the firm's segments put up another stellar quarter and are on pace to meet our forecast, which calls for a little over 5% revenue growth. On an organic constant-currency basis, applied sterilization technologies accelerated to a high-single-digit pace, growing 8.7% versus our 8% estimate, as procedure volume remains robust. Life sciences and healthcare products lagged, but much of this was likely timing related as the firm's backlog grew to record levels in the quarter.

In light of the recent appointment of Dan Carestio to the newly created position of chief operating officer, we'd reiterate our view that the management team at Steris deserves an Exemplary stewardship rating. Carestio is a two-decade veteran of the firm and had operating responsibilities for two of its four businesses before his promotion. CEO Walter Rosebrough reassured investors that he's not planning to retire any time soon, although in our view this change positions Carestio as a likely successor.