STERIS plc (STE Quick QuoteSTE - Free Report) has been gaining from a robust performance by its Healthcare, Applied Sterilization Technologies (AST) and Life Sciences segments. Revenue contributions from Cantel Medical and Key Surgical acquisitions buoy optimism. A bullish 2022 outlook further instills investor confidence. However, mounting operating expenses and stiff competition do not bode well.

Over the past year, shares of this Zacks Rank #3 (Hold) company have gained 29.8% against the industry’s 2.9% rise. The S&P 500 rose 15.8% in the same period.

The renowned provider of infection prevention as well as other procedural products and services has a market capitalization of $24.75 billion. Its earnings for the third quarter of fiscal 2022 surpassed the Zacks Consensus Estimate by 8.7%.

The company projects 11.3% growth for the next year, which compares to the industry’s growth projection of 20.1% and the S&P 500’s growth expectation of 10.7% for the next year.

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Let’s delve deeper.

Factors at Play

Strong Segmental Performance: We are encouraged by STERIS’ robust segmental performance in the third quarter of fiscal 2022. Revenues at the Healthcare arm rose 45.6% year over year on an 84% increase in consumable revenues, a 19% rise in service revenues and a 47% improvement in capital equipment revenues. Revenues at AST improved 22.6% year over year. Meanwhile, revenues in the Life Sciences segment rose 15.4% year over year on 23% growth in consumable revenues, a 5% rise in capital equipment revenues and a 13% increase in service revenues.

Progress in Healthcare and Pharmaceutical Industries: STERIS derives a significant chunk of its revenues from the healthcare and pharmaceutical industries. The company’s notable acquisitions of Cantel Medical and Key Surgical have led to strong performance in this space. In this regard, we may note that consumable revenues from both Key Surgical and Cantel Medical accounted for about 60% of approximately $210 million in acquired revenues within the Healthcare segment. According to STERIS, with the addition of Key Surgical and Cantel products and services, the company will be better positioned than ever to meet customers' needs.

Upbeat Guidance: STERIS has updated its financial guidance for fiscal 2022. The company projects constant currency organic revenue growth of about 11% compared with the previously-guided 10-11%. Adjusted earnings per diluted share are anticipated in the band of $7.85-$7.95 (up from the prior expectation of $7.60-$7.85).

Downsides

Escalating Expenses: During the fiscal third quarter, STERIS’ SG&A expenses rose 70.3% year over year, whereas R&D expenses climbed 51% year over year. These escalating operating expenses led to a 141-basis-point contraction in the operating margin, building pressure on the bottom line.

Macroeconomic Problems: Governments and insurance companies continue to look for ways to contain the rising cost of healthcare. This might put pressure on players in the healthcare industry with STERIS being no exception. Further, the ongoing supply-chain challenges, inflation and unfavorable currency fluctuations continue to impact the company’s performance.

Competitive Landscape: STERIS competes for pharmaceutical, research and industrial customers against several large companies with robust product portfolios and global reach as well as several small companies with limited product offerings and operations in one or a few countries. Management believes that the company’s current or potential competitors might possess greater resources, allowing them to succeed in developing and commercializing products at a much faster rate.

Estimate Trends

STERIS has been witnessing a positive estimate revision trend for fiscal year 2022. For the past 60 days, the Zacks Consensus Estimate for STERIS’ earnings has moved 1.7% north to $7.90.

The Zacks Consensus Estimate for fiscal 2022 revenues is pegged at $4.55 billion, suggesting 46.6% growth from the fiscal 2021 reported number.

Key Picks

A few better-ranked stocks in the broader medical space are AMN Healthcare Services, Inc. (AMN Quick QuoteAMN - Free Report) , Henry Schein, Inc. (HSIC Quick QuoteHSIC - Free Report) and McKesson Corporation (MCK Quick QuoteMCK - Free Report) .

AMN Healthcare has a long-term earnings growth rate of 16.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 19.5%, on average. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 44.4% versus the 54.5% industry decline.

Henry Schein has an estimated long-term growth rate of 11.8%. Henry Schein’s earnings surpassed estimates in the trailing four quarters, the average surprise being 25.5%. It currently has a Zacks Rank #2 (Buy).

Henry Schein has outperformed the industry over the past year. HSIC has gained 28.2% compared with the industry’s 10.2% rise over the past year.

McKesson has a long-term earnings growth rate of 11.8%. McKesson’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 20.6%, on average. It presently carries a Zacks Rank #2.

McKesson has outperformed the industry over the past year. MCK has gained 57.4% in the said period compared with 10.2% growth of the industry.