EUR 850.00 For Business Accounts Only

Morningstar | Steris' 2Q Tracks Our Expectations

Narrow-moat Steris reported fiscal second-quarter results that were, on balance, in line with our expectations. The firm had a stellar quarter for capital equipment sales, with service and consumable revenue falling just shy of our forecast. We'll make some small changes to our model, mostly to incorporate a lower tax rate for the full year, but we're already more or less in line with management's raised revenue outlook. We don’t anticipate a change to our $101 fair value estimate, which implies roughly 14 and 21 times our respective estimates for adjusted EBITDA and earnings in fiscal 2019.

While the healthcare services and applied sterilization businesses performed largely in line with our thinking, each up roughly 7% versus last year, the capital equipment portion of the healthcare products and life science segments vastly outperformed our expectations. In healthcare products, capital revenue was up 12%, and in life sciences it was up roughly 27%. While we don't anticipate this level of growth to continue throughout the year, we are encouraged by the company's combined backlog, which expanded 20% versus the prior-year period and nearly 10% from the fiscal first quarter. Gross margin saw slight compression as a result of this product mix shift, but we still anticipate modest improvement in the firm's adjusted operating margin for the full year.

Management announced its intent to redomicile the business from the United Kingdom to Ireland in response to potential risks associated with the U.K.'s ongoing effort to leave the European Union. Steris redomiciled in the U.K. in connection with its acquisition of Synergy Health in 2015, and management is concerned the firm could lose many of the favorable tax benefits it gained in the inversion. The company has to hold a shareholder vote to approve the proposal, but we see no reason it shouldn’t pass before the country's departure from the EU, which is scheduled for March 2019.