EUR 850.00 For Business Accounts Only

Morningstar | Steris' Narrow Economic Moat Supported By Elevated Investment in Fiscal 2020

We believe management’s investment strategy at Steris has been instrumental in forming a narrow-moat enterprise, deploying capital into internal initiatives and acquisitions to fortify the firm’s position as the global leader in infection prevention. The 1997 purchase of Isomedix formed the foundation upon which the company built its leading position in contract sterilization services in the healthcare industry, capped by the acquisition of U.K.-based Synergy Health in 2015. We think this piece of the business represents the widest-moat segment of the firm, as switching costs and regulatory intangibles create impediments to customers transitioning between providers and barriers dissuading competitive entry. Elsewhere in the company, we view the healthcare products and life sciences businesses as convincingly narrow-moat segments. These franchises sell sterilizers and related consumables into surgical suites and biopharma manufacturing plants, which benefit from the embedded switching costs associated with long-lived capital equipment. While the budding services segment remains a no-moat, commoditized product repair business, we think management should be able to improve margins over time by rightsizing investment while continuing to consolidate the fragmented industry in the U.S.Ultimately, we think the firm’s positioning offers a convincing opportunity to earn returns in excess of cost of capital over the coming decade. By our estimate, management has been able to consistently earn a midteens return on invested capital for the enterprise, with this number muted in recent years by the addition of Synergy Health. As the costs of integration begin to fade, we believe the firm is likely to return to its historical levels of economic profit generation, driven by substantial margin improvements. Management has worked to prune the business portfolio, divesting the no-margin linen business, and this is a primary driver of expected near-term cost improvements. Over time, we anticipate the firm will be able to sustain 50 to 100 basis points or so of annual margin expansion, driving accelerating ROIC over our forecast period.