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THE COMPANY

Steris Corporation (NYSE:STE) is a global leader in infection prevention, contamination control, surgical and critical care technologies, and more.

The company is the world's pre-eminent infection prevention, decontamination, and surgical and critical care company, with a long list of first-to-market products and industry-leading service innovations and thousands of customers in more than 60 countries. The company has $1.4 billion in revenue, 75% derived from the U.S. and anticipates a 3% to 6% annual growth rate.

Steris is broken out into three lines of business:

  1. Healthcare: Infection prevention and surgical solutions and services.

  2. Life Sciences: Pharmaceutical manufacturing and research laboratories.

  3. Isomedix: Contract sterilization services.

BUSINESS SEGMENTS

Steris' Healthcare segment can be broken down into surgical solutions, which provides LED lights, surgical tables, integrated operating rooms, and infection prevention, consisting of washer disinfectors, gas and steam sterilizers, liquid chemical processing systems, dedicated consumables, detergents, and hand hygiene products. The Healthcare segment makes up 75%, or $712 million, of revenue and 61% of EBIT.

The company's life sciences segment provides pharma washers, research sterilizers and laboratory washers. This business segment accounts for 16% of revenue and 20% of EBIT.

Finally, the Isomedix segment provides gamma irradiation and ethylene oxide contract services primarily to medical device manufacturers, with more than 80% of its customers on long-term contracts. This segment accounts for 12% of revenue and 23% of EBIT.

INVESTMENT CONSIDERATIONS

GROWTH: Steris expects revenue growth of mid-to-high single digits driven by market growth, new products and acquisitions. Given its expected revenue growth, earnings per share are expected to grow in the double digits on increased margins due to volume growth, increased in-sourcing, lean manufacturing and increased efficiencies.

In August 2012, Steris purchased US Endoscopy for $220 million a company that aligns with Steris' current product offerings and has had double-digit organic growth through new product offerings.

In October 2012, the company purchased Spectrum and TRE for $110 million, whose services include Primary services including inspection, cleaning, lubrication and repair of reusable surgical instruments.

INCOME: In addition to the revenue growth, the company currently pays a $0.19 per share dividend or 2%. While this may not be a high-yielding company, the 5-year dividend growth rate is over 25%. With a current payout ratio of 28% and the ability to capitalize on the operational leverage inherent in a service oriented business, there remains the ability for further dividend raises.

  • P/E Ratio: 14.85

  • Market Cap: 2.2 billion

  • TTM Revenue: $1.4 billion

  • ROE: 18.8%

  • Operating Margin: 17.5%

  • Debt to Equity: 49.3

  • Current Ratio: 2.6

  • Beta: 0.75

CONCLUSION

Steris is a growing Mid Cap that will allow you to capitalize on the well documented aging of the baby boomers and their ever increasing need for healthcare. With a P/E ratio slightly below 15, the stock is reasonably priced. STE is a low-volatility stock, so one would expect the company to underperform in bull markets, yet outperform in bear markets and ultimately outperform the market on a total return basis with less risk. Steris has been aggressive in its acquisition strategy focusing on consolidating a highly fragmented marketplace. While mid-to-high single digit revenue growth may not seem like large figures, as previously noted, service businesses are able to gain leverage on increased revenues causing margins to expand. With increasing margins, more revenue falls to the bottom line rewarding shareholders through dividends and dividend growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Steris: A Mid-Cap Healthcare Dividend Growth Stock