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STERIS (STE): Q2 Results Disappoint, Acquisitions Bode Well


On Nov 23, we issued an updated research report on OH-based STERIS plc STE, a manufacturer and marketer of infection prevention, decontamination, microbial reduction, and surgical and gastrointestinal support products and services. The company currently carries a Zacks Rank #4 (Sell).

STERIS ended second-quarter fiscal 2017 on a dismal note, wherein both its earnings and revenues missed the Zacks Consensus Estimate. Moreover, weak cost savings continue to be an overhang.

Adjusted gross margin contracted in the reported quarter mainly due to additional costs related to the Synergy Health acquisition, which outweighed favorable currency translations, suspension of the Medical Device Excise Tax as well as the improvement in pricing and productivity. The company’s lowered revenue guidance for fiscal 2017 is disappointing too, as it indicates no chance of a recovery any time soon.

Further, we are concerned about the current customer consolidation scenario, which would continue to hurt STERIS unless checked immediately. The competitive landscape is another cause of concern.

On the bright side, despite the currency and market headwinds, STERIS’ business grew both organically and through strategic acquisitions in the fiscal second quarter. Synergy Health – acquired last year − was one of the primary contributors to the strong double-digit revenue growth recorded by the combined company.

The consolidation widened STERIS' reach from its core market North America to Europe where Synergy has a solid base. It also provided STERIS an opportunity to cater to the emerging markets of the Asia-Pacific and Latin America.

Note that STERIS has always focused on its strategy of growth through acquisitions. In Jul 2016, the company bought Medisafe Holdings, a UK-based manufacturer of washer disinfector equipment, which also markets related consumables and services. Per management, Medisafe's products and services complement STERIS' global healthcare offering by providing washer R&D and production in the UK.

Stocks to Consider

Better-ranked medical stocks are NxStage Medical Inc. NXTM, Baxter International Inc. BAX and Bovie Medical Corporation BVX. NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical surged 28.4% over the last one year compared to the S&P 500’s 5.6% over the same period. The company has a four-quarter average positive earnings surprise of 50.00%.

Baxter International rallied 22.9% over one year, much higher than the S&P 500’s 5.6%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 114.8% gain in the past one year, way better than the S&P 500’s 5.6%. The company has a trailing four-quarter positive average earnings surprise of 28.7%.

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