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 |
