Steris PLC

Steris reported 6% constant-currency organic revenue growth and 11% adjusted EPS growth for the first quarter of fiscal 2027. Management announced a $600 million investment in a new facility in North Carolina and raised expected capital expenditure in 2027 to $450 million (from $375 million).

Why it matters: Steris' earnings appeared in line with our expectations, and shares closed almost unchanged from the previous day's close. Recurring revenue between consumables and servicing delivered 8% growth, and the firm's order backlog also grew by 8%. Healthcare reported 6% constant-currency organic growth, and the segment's operating margin rose 60 bps to 24.8%, with positive impacts from volume, price, productivity, and product mix partly offset by inflation, tariffs, and investments. Life sciences grew 8%, but margin fell 140 basis points to 42.1% on inflation and unfavorable productivity. Applied sterilization technologies grew 5%, trailing its 7%-8% full-year guided range, as medtech customers continued destocking against tough prior-year comparisons. Management expects growth to reaccelerate in the third fiscal quarter against easier comparisons.

The bottom line: We maintain our $244 fair value estimate for narrow-moat Steris. We view shares as about fairly valued in 3-star territory. Management recently authorized a share repurchase plan worth up to $1 billion and announced plans to commit $200 million-$300 million annually for share buybacks. The firm got a headstart in the first fiscal quarter by purchasing $116 million worth of shares, which we think was a good move as shares were generally trading at a modest discount to our fair value estimate. The North Carolina manufacturing investment will be cost-neutral initially. However, we view the increased capacity as a positive signal and think the consolidated facility should provide operating leverage over time.

We maintain our $244 fair value estimate for narrow-moat Steris, mainly supported by mid- to high-single-digit revenue growth and slight margin expansion.

We expect the majority of top-line growth to come from the healthcare segment. Steris’ healthcare business benefits from the secular demand for medical procedures, as the aging population becomes a dominant trend across the company’s major markets. We think the increase in preventive screenings would bring strong tailwinds to products serving endoscopy suites in the long term.

Acquisitions have been a key part of Steris’ healthcare segment, but after its unsuccessful dental integration, we expect the company will become more careful when evaluating potential synergies from future transaction opportunities. We have a positive view of the firm's recently authorized share repurchase announcement and believe the smaller tuck-in acquisitions that Steris is currently pursuing serve as a defensible use of capital.

We believe AST's top-line growth will reach 10% as new plants ramp up production and forecast the segment to eclipse $1.5 billion in revenue by 2030. AST carries the highest margins and fastest revenue growth across Steris’ three segments, and the firm is nearing completion of its multiyear X-ray AST expansion that has allowed it to further its technological prowess and maintain its leading sterilization offering.

We think Steris has a narrow economic moat supported by high switching costs across its healthcare, life sciences, and applied sterilization technologies, or AST, businesses. As a leading provider of sterilization services and equipment, Steris has built extensive relationships with healthcare organizations, pharmaceutical companies, and medical device manufacturers. Steris’ recurring revenue sits at roughly 80% of total revenue, with most of that coming from the higher-margin services and consumables categories, which helps defend the spread between Steris’ return on invested capital and cost of capital. Moreover, we give Steris’ AST business a wide moat rating due to a more stringent regulatory environment that further strengthens customers’ switching costs.

The healthcare segment is the bread and butter of Steris’ business, currently accounting for approximately 70% of the company’s total revenue. We see a narrow moat for this segment because of Steris’ capability to generate recurring sales from consumables and services after customers make purchases of capital equipment, such as washers, sterilizers, and automated endoscope reprocessors. The capital equipment Steris sells to healthcare customers is usually priced between $20,000 $100,000 a piece, and they are a crucial part of any hospital or procedural center’s operations. Customers tend to scrutinize these instruments’ reliability, as it directly determines their operating quality and efficiency. Therefore, parts and maintenance services from the original equipment manufacturer become the preferred choice. In addition, the maintenance and sterilization cost per instrument is usually less than $1. Given the low-cost, mission-critical nature of the sterilization process, we see strong switching costs once a healthcare provider chooses to source equipment from Steris. Steris often enters into preventive maintenance and extended warranty agreements with clients for up to 5 years, and their instrument reprocessing services contracts with clients can last up to 15 years. These contract terms allow Steris to capture value throughout the capital equipment’s lifespan while keeping clients within its ecosystem, which we view as a variant of the razor-and-blade business model common in the medical devices industry.

Many companies compete with Steris in the healthcare space both product-wise and service-wise, including wide-moat Stryker and no-moat Getinge. We believe independent ambulatory surgery centers, or ASCs, and physician offices, which do not have the same procurement resources as hospitals, often find Steris’ integrated solutions more attractive than what Steris’ competitors can provide. Steris constantly seeks acquisition opportunities to enhance its healthcare offerings, and we think these transactions can grow Steris’ top line without diluting its moat.

Steris’ Applied Sterilization Technologies, or AST, segment comprises 19% of total revenue and provides contract sterilization services and sterility validation services to medical device and pharmaceutical manufacturers. We give this segment a wide moat rating because we see stronger switching costs stemming from stringent regulatory requirements. Steris provides both radiation-based and gas-based sterilization, and these processes often involve harmful materials such as Cobalt-60 and Ethylene Oxide that are known to cause cancer. Given the high risk of excessive chemical residuals, the US Food and Drug Administration requires medical device manufacturers to include sterility information in their 510(k) or premarket approval submissions. Once accepted by the FDA, a medical device manufacturer is unlikely to switch to another sterilization provider, as it usually requires supplementary filing. In addition, 80% of Steris’ AST customers are on 3-to-5-year contracts, which also helps retain high switching costs.

The only major competitor to Steris’ AST business is Sterigenics, a subsidiary of Sotera Health. Environmental backlash related to excessive ethylene oxide, or ETO, emissions have been troubling Sterigenics in recent years and the competitor has been more severely affected by material lawsuits relating to EtO’s potential toxic effects. While fiscal 2025 brought a smaller but similar problem to Steris, the monetary impacts of recent settlements are not significant to our valuation estimate. We see traces of intangible assets in Steris’ AST process that complement its switching costs, as Steris’ unique participation with the FDA’s Master File Pilot Programs on radiation and ETO sterilization highlight the firm's deep domain knowledge and make it a preferred and trusted partner.

We think Steris’ life sciences segment, which comprises approximately 10% of total revenue, enjoys a narrow moat because it follows a razor-and-blade business model similar to the healthcare segment. It also sells capital equipment, such as sterilizers and washers, and the associated consumables and maintenance services. However, instead of hospitals and procedural centers, this segment’s end market is vaccine and biopharma makers who require aseptic (contamination-free) manufacturing processes. Despite the smaller size, we consider life sciences to have a more attractive business mix than healthcare as it focuses purely on the higher margin sterilization products, whereas healthcare also sells other types of equipment used in the operating room, such as surgical lights and tables. Meanwhile, 75% of the life sciences revenue comes from consumables and services, compared with Healthcare’s roughly 70%. Thanks to the favorable mix, life sciences’ operating margin is around 18 percentage points higher than Healthcare’s, and we expect this trend to continue through our five-year explicit forecast period.

Steris’ technological leadership in applied sterilization technologies, or AST, could attract new customers that lack the capacity to navigate regulatory challenges.

Steris’ track record of supplying mission-critical sterilization plus operating room and endoscopy equipment creates durable switching costs for healthcare providers with stable long-term growth trends.

An aging population and increased adherence to preventive screening could increase endoscopy utilization.

Steris’ frequent acquisitions may not always achieve promised synergies, especially for businesses operating in niche verticals like dental or renal.

Innovation in sterilization and bioprocessing processes may impair the attractiveness of Steris’ current healthcare and life sciences offerings.

Uncertainty with ETO regulations may affect the expansion plans of applied sterilization technologies globally.