Steris Fights Infection, Stock Slump

Steris, which has been resilient in the market slump, is in line to help protect Americans and companies against infections and contamination.
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(STE) - Get Report

, 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. 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.

Steris' revenue is allocated among three business units. Health care is the largest, representing 71% of the total. Customers include hospitals and surgical centers. Life sciences is the second biggest, accounting for 18%, with pharmaceutical manufacturing and research clients. Isomedix is the smallest subsidiary, making up 11% of revenue and selling to medical-device manufacturers, consumers and industrial customers.

The defense and industrial group operates within the life sciences division and provides specialized services for the government and corporations. Steris recently developed what it calls a Modified Vaporized Hydrogen Peroxide Decontamination Technology in conjunction with the U.S. Army. The vapor is a safe and effective way to sterilize areas with electronic equipment. Defense and industrial represents a relatively small portion of total revenue, indicating an area of potential growth if the company can win government contracts.

A report was released this week warning the Obama administration that the country could face a biological terrorist attack before 2013. This information could act as a catalyst to shift defense spending toward companies like Steris, which have expertise in pathogen sterilization. A potential shift in defense spending might make Steris an attractive target for a large aerospace and defense company.

There are six other research firms currently covering Steris, three of which rate the stock "buy" and three "hold." These are positive reviews given current market turmoil, but there are numerous risks facing the company. Steris has a remarkably high institutional-owned percentage of 94%, which indicates that the stock might face a quick decline if it misses a quarterly earnings estimate.

On the positive side, institutional investors are obviously optimistic about Steris. Be wary of the "value trap" in a market selloff. Strong fundamentals and value are no guarantee of share-price appreciation. Steris is relatively liquid with average daily trading volume of 850,522 shares.