STE Steris
Durable sterilization toll-collector, but $210 still prices in more margin and reinvestment efficiency than cash flows show.
The story
STERIS is the sterilization and infection-prevention franchise for hospitals, med-device makers and pharma. About three-quarters of revenue is recurring consumables, service and contract sterilization, protected by regulatory validation lock-in and a scarce network of gamma, EtO and E-beam capacity. It is a mature compounder: mid-to-high single-digit growth, margins recovering after the Cantel integration and the Dental divestiture, with low risk of disruption.
Growth, margin and risk are unchanged: TTM revenue of $6.04B and a 19% margin sit on the path to 21%. I raised sales-to-capital from 0.65 to 1.0 because the old ratio came from goodwill-heavy acquisition capital, while organic reinvestment is light (capex of $0.36B is below D&A of $0.49B). I extended the horizon from 7 to 8 years because recurring, validation-locked demand supports a longer run of excess returns. Both changes address the prior valuation's roughly 100% gap to the market.
Value drivers
| Revenue growth (Y1) | 7.0% |
| Terminal growth | 3.0% |
| Forecast horizon | 8y |
| Target operating margin | 21.0% |
| Years to target margin | 4 |
| Sales-to-capital | 1.00 |
| Beta | 0.88 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 8.7% |
| Terminal WACC | 9.2% |
Valuation bridge
| PV of explicit FCFF | 4.52B |
| PV of terminal value | 8.14B |
| Equity value | 11.04B |
| ÷ shares → per share | $113.20 |
News
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- 1 of Wall Street’s Favorite Stocks with Exciting Potential and 2 We Brush Off
- STERIS Stock: Is STE Underperforming the Healthcare Sector?
- Steris (STE) Down 2.1% Since Last Earnings Report: Can It Rebound?
- STERIS (STE) Stock Looks Reasonable On Earnings With Cash Flow Slightly Stretched
- STERIS (STE) Could Be 12% Below Fair Value As Conference Focus Returns
- STERIS Stock Outlook: Is Wall Street Bullish or Bearish?
- Can STERIS Stock Deliver as Its $600 Million Chemistry Bet Scales?
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 6.46B | 7.0% | 19.5% | 945.84M | 422.63M | 523.20M | 481.24M |
| 2 | 6.88B | 6.4% | 20.0% | 1.03B | 415.30M | 616.59M | 521.65M |
| 3 | 7.28B | 5.9% | 20.5% | 1.12B | 402.71M | 716.34M | 557.44M |
| 4 | 7.66B | 5.3% | 21.0% | 1.21B | 384.71M | 821.63M | 588.10M |
| 5 | 8.02B | 4.7% | 21.0% | 1.26B | 361.25M | 901.96M | 593.82M |
| 6 | 8.36B | 4.1% | 21.0% | 1.32B | 332.43M | 983.11M | 595.34M |
| 7 | 8.66B | 3.6% | 21.0% | 1.36B | 298.45M | 1.06B | 592.69M |
| 8 | 8.91B | 3.0% | 21.0% | 1.40B | 259.65M | 1.14B | 585.98M |
Key risks
- EtO emissions regulation and litigation raising AST costs or forcing capacity closures
- Hospital capital-spending slowdown and med-tech procedure volume softness
- Acquisition-driven capital allocation diluting returns on capital
Catalysts
- AST capacity additions (X-ray/E-beam) fed by biopharma and med-device outsourcing
- Margin expansion toward 21%+ as the post-divestiture mix shifts to recurring revenue