In a sliding market, STERIS has defied the odds, trading up to $245 per share. Its 11.8% gain since November 2024 has outpaced the S&P 500’s 2.5% drop. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in STERIS, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is STERIS Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about STERIS. Here are three reasons why there are better opportunities than STE and a stock we'd rather own.
1. Adjusted Operating Margin in Limbo
Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.
Analyzing the trend in its profitability, STERIS’s adjusted operating margin might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 23.2%.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, STERIS’s margin dropped by 3.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. STERIS’s free cash flow margin for the trailing 12 months was 11.3%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
STERIS historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
STERIS isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 24.5× forward P/E (or $245 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of STERIS
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.
