What Is Going on With STE Shares?

Shares of STERIS (STE) jumped 5.6 % during today's morning session, bringing their 52 week performance to None%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's growth and market sentiment factors.

STERIS plc provides infection prevention and other procedural products and services worldwide. The large-cap Healthcare company is based in Dublin, Ireland and has 16,000 full time employees.

STE Has a Higher P/E Ratio Than the Sector Average

Compared to the Healthcare sector's average of 13.21, STERIS has a trailing twelve month price to earnings (P/E) ratio of 40.1 and an expected P/E ratio of 28.8. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $5.03 or forward earnings per share of $7.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since STERIS's P/E ratio is higher than its sector average of 13.21, we can deduce that the market is overvaluing the company's earnings.

STERIS Is Overvalued in Terms of Expected Growth

STERIS's PEG ratio is 2.01. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in STERIS's case, it tells us the company is overvalued.

STE Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since STERIS's P/B ratio of 4.4 is higher than its sector average of 4.07, such a margin of safety does not exist for the stock.

Investors Stand to Gain from STE's Cash Flows

STERIS has strong cash flows. With a coefficient of variability of 10.8% and an average growth rate of 5.2%, the company is effectively turning its revenue into cash. We calculate STERIS's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a 14.9% rate, versus 8.5% for operating expenses:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2022-03-31 685 -288 397 -11.8
2021-03-31 690 -239 450 19.77
2020-03-31 591 -215 376 7.51
2019-03-31 540 -190 350 n/a

STERIS's Is a Profitable Business

If you are looking to make STE a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively STERIS is run.

STERIS's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2022-03-31 4,585 2,569 43.98 1.76
2021-03-31 3,108 1,764 43.22 -0.76
2020-03-31 3,031 1,711 43.55 3.08
2019-03-31 2,782 1,607 42.25 n/a

STERIS's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2022-03-31 4,585 1,591 9.28 -47.12
2021-03-31 3,108 798 17.55 -1.07
2020-03-31 3,031 782 17.74 11.57
2019-03-31 2,782 733 15.9 n/a

STERIS's cost of revenue is growing at a rate of 18.4% in contrast to 36.0% for operating expenses. Sales revenues, on the other hand, have experienced a 19.7% growth rate. As a result, the average gross margins growth is 1.4 and the average operating margins growth rate is -12.2, with coefficients of variability of 1.7% and 26.3% respectively.

STERIS Benefits From Positive Market Signals

The market sentiment regarding STERIS is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $250 to $225. STE is trading -15.17% away from its target price of $237.5. 1.9% of the company's shares are tied to short positions, and 94.8% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 11,695,881 2022-06-29 12% $2,411,105,868
Blackrock Inc. 8,170,453 2022-06-29 8% $1,684,338,885
WCM Investment Management, LLC 5,792,135 2022-09-29 6% $963,116,207
Massachusetts Financial Services Co. 4,598,458 2022-06-29 5% $947,972,116
State Street Corporation 4,240,785 2022-06-29 4% $874,237,827
Apg Asset Management N.V. 3,388,311 2022-06-29 3% $698,500,312
Price (T.Rowe) Associates Inc 2,392,191 2022-06-29 2% $493,150,174
Janus Henderson Group PLC 2,362,321 2022-06-29 2% $486,992,474
Geode Capital Management, LLC 2,006,924 2022-06-29 2% $413,727,382
Pictet Asset Management SA 1,687,803 2022-06-29 2% $347,940,588
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.