Report
Jake Strole
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Morningstar | Steris Posts Strong Finish to Fiscal 2019; Initial 2020 Outlook Ahead of Our Expectations

Narrow-moat Steris finished its fiscal 2019 on a remarkably strong note, posting 9% constant currency organic growth in the quarter and 7.6% for the year. As we update and roll our model, we'll likely raise our $104 per share fair value estimate by a mid-single-digit percentage as some positives are offset by a higher-than-expected capital investment program over the next several years. Strength was broad based across its four businesses, which lays the groundwork for a solid 2020. Our expectations for the coming year fell at the lower end of management's outlook, which calls for 5% to 6% organic revenue growth and adjusted earnings growth of roughly 8% to 11%.   However, with shares trading near 25 times 2020 EPS projections we think the stock remains on the more expensive side of fair value.

While each segment reported robust quarterly growth, the applied sterilization technologies and healthcare services segments continue to outperform. Both businesses grew revenue in the low double digits year over year and contributed to the 170 basis points of companywide adjusted operating margin expansion. Additionally, Steris announced an investment initiative that puts fiscal 2020 capital expenditures well ahead of our $190 million estimate. Management intends to invest roughly $110 million in incremental growth capital, placing the total capital expenditures budget near $280 million. The bulk of this spending will be allocated to global capacity additions in the AST segment, helping support mid- to high-single-digit growth over the long term. This higher level of investment lowers our free cash flow forecast over the next few years, but our midteens midcycle free cash flow margin assumption remains unchanged.

We view AST as the most competitively advantaged franchise at Steris, and with segment operating margins eclipsing 40% we think these investments further management's long history of prudent capital deployment consistent with our Exemplary stewardship rating.
Underlying
STERIS Plc

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Jake Strole

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