Steris Fights Infection, Stock Slump

Steris (STE Quote), a company that makes health-care equipment, is likely to see increased demand as baby boomers, medical professionals and the U.S. government grow cautious about the risks of contamination.

TheStreet.com Ratings views the company a buy, ranking among the top stocks evaluated by our quantitative model. The Ohio-based company has a diversified revenue stream, outstanding cash reserves and healthy margins.

Steris provides sterilization services and products to hospitals, medical-device manufacturers and individuals. As baby boomers age into seniorhood, the health-care industry is growing. A rise in medical operations and tighter regulation of hospital sterilization should benefit Steris, and its stock.

There is also growing support for some form of nationalized health-care coverage, which would increase the number of people who are insured and propel industry growth. Demand for personal sterilization products ought to improve as people become aware of the spread of infection.

Steris' fiscal second-quarter revenue increased 9.5%, while net income soared 79.8% over the same period a year earlier. Steris has demonstrated resilient margins and growth despite a weak economy. Gross margins declined a modest 73 basis points to 45.4% during the latest quarter and operating margins increased 535 basis points to 14.6%. Return on assets jumped to 8.1% from 6.7%, and return on equity advanced to 13.7% from 10.4%.

Steris shares have decreased 9% this year. We see opportunity in the share-price decline and believe that Steris will outperform in the long run. Strong fundamentals and an admirable market position make STE an attractive buy-and-hold stock. The stock is fairly priced based on price to earnings, but it is trading at a relative discount based on price to cash flow, price to sales, price to book and price to projected earnings. A quick ratio of 2.0 and debt-to-capital ratio of 0.25 indicate a strong liquidity position and low leverage, respectively.