STERIS Q1 Earnings Beat Estimates, Operating Margin Falls

STERIS plc STE reported first-quarter fiscal 2025 adjusted earnings per share of $2.03, up 10.3% from the year-ago quarter's figure. The figure surpassed the Zacks Consensus Estimate by 2 cents.

The adjustment excludes the impacts of certain non-recurring charges, such as the amortization of acquired intangible assets and acquisition and integration-related charges, among others.

The company's GAAP EPS was $1.41, up 7.6% from the year-ago level of $1.31.  

Revenues in Detail

Revenues of $1.28 billion from continuing operations increased 8.5% year over year. The figure outpaced the Zacks Consensus Estimate by 1.5%.

Organic revenues at the constant exchange rate or CER rose 6% year over year.

Quarter in Detail

The company operates through three segments — Healthcare, Applied Sterilization Technologies ("AST"), and Life Sciences.

Revenues at Healthcare rose 10% year over year to $901.2 million (up 5% on a CER organic basis). While there was a 23% improvement in consumable revenues and a 14% increase in service revenues, these were partially offset by a 10% decline in capital equipment revenues.  Our model expected Healthcare segment revenues to improve 6.9% in the fiscal first quarter.

Revenues at AST improved 7% to $249.8 million (up 8% on a CER organic basis). This performance reflected 7% growth in service revenues and a 24% increase in capital equipment revenues. Our model anticipated a 6.4% improvement in the segment's revenues in the reported quarter.

Revenues in the Life Sciences segment decreased 2% to $128.5 million (up 4% year over year on a CER organic basis). The decline in revenues was due to the divestiture of the CECS business. This performance reflected 13% growth in consumable revenues, offset by a 15% decline in capital equipment revenues and a 17% decline in service revenues. Our model projected a year-over-year improvement of 5.8% in the segment's revenues.

Margins

The gross profit in the reported quarter was $572.4 million, up 8.2% from the prior-year quarter. The gross margin expanded a marginal 4 basis points (bps) year over year to 44.7% due to an 8% rise in the cost of revenues.

STERIS witnessed a 9.5% year-over-year rise in selling, general and administrative expenses. The figure amounted to $335.6 million. Research and development expenses rose 3.6% to $25.6 million. Adjusted operating expenses of $361.2 million increased 9% year over year. The adjusted operating margin contracted 20 bps to 16.5%.

Financial Details

STERIS exited the first quarter of fiscal 2025 with cash and cash equivalents of $198.3 million compared with $207 million at the end of fiscal 2024.

Cumulative net cash flow from operating activities at the end of the fiscal first quarter was $303.7 million compared with $123.8 million in the year-ago period. Further, the company has a five-year annualized dividend growth rate of 8.44%.

Guidance

STERIS reiterated its fiscal 2025 projection.

The company expects revenues to increase 6.5-7.5%. Organic revenues are expected to be 5-7% at CER.

The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $5.48 billion, implying 7.3% growth from fiscal 2024.

Adjusted EPS is expected to be in the range of $9.05-$9.25. The Zacks Consensus Estimate for the metric is pegged at $9.16.

Our Take

STERIS exited the first quarter of fiscal 2025 with better-than-expected results, wherein both adjusted earnings and revenues beat their respective consensus estimate. The ongoing momentum of the Healthcare segment is attributed to a solid procedure volume growth in the United States, along with favorable pricing.

The addition of the surgical instrumentation assets purchased from BD was a positive factor behind the strong growth of Healthcare operating income. Further, the AST segment reflected an improvement in capital equipment revenues and service revenues in the quarter under review. The expansion of the gross margin bodes well for the stock.

Meanwhile, performance in Life Sciences was dented due to the divestiture of the CECS business. The contraction of the operating margin is concerning.

Zacks Rank & Key Picks

STERIS currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the broader medical space are Intuitive Surgical, Abbott Laboratories, Inc. and Quest Diagnostics.

Intuitive Surgical reported a second-quarter 2024 adjusted EPS of $1.78, which beat the Zacks Consensus Estimate by 16.3%. Revenues of $2.01 billion topped the consensus estimate by 2%. ISRG currently sports a Zacks Rank #1 (Strong Buy).

Intuitive Surgical has a long-term earnings growth rate of 16.1% for 2024 compared with the industry's 14.1%. The company's earnings surpassed estimates in each of the trailing four quarters, the average surprise being 8.97%.

Abbott, carrying a Zacks Rank #2 (Buy) at present, reported second-quarter 2024 earnings of $1.14 per share, which surpassed the Zacks Consensus Estimate by 3.6%. Revenues of $10.38 billion topped the Zacks Consensus Estimate by 0.3%.

ABT has an earnings growth rate of 10.1% for 2025 compared with the S&P 500's 9.3%. The company beat on earnings in each of the trailing four quarters, the average surprise being 2.34%.

Quest Diagnostics, carrying a Zacks Rank #2 at present, reported a second-quarter adjusted EPS of $2.35, which surpassed the Zacks Consensus Estimate by 1.7%. Revenues of $2.40 billion outpaced the Zacks Consensus Estimate by 0.5%.

DGX has a historical five-year earnings growth rate of 7.4% compared with the industry's 4.2%. The company's earnings surpassed estimates in each of the trailing four quarters, the average surprise being 3.31%.

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