STERIS: Surgical gains

07/14/2016 7:00 am EST

Focus: STOCKS

Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

The health care sector finds itself at the intersection of two countervailing trends: efforts to control rising costs and growing demand as the population, states Peter Staas, editor of Capitalist Times.

One of our favorite health care stocks -- STERIS (STE) -- stands to benefit from both of these trends, providing an essential service to hospitals, surgical centers and medical equipment companies.

The firm offers sterilizing medical devices and implements as well as preventing infection — a major concern with the rise of so-called superbugs that resist antibiotics and other treatments.

Given the critical nature of these products and services to patients’ safety, hospitals and other medical centers can’t afford to skimp in this department.

Over the long term, STERIS offers leverage to increasing demand for medical procedures, including preventative screenings such as endoscopies and colonoscopies.

Management has grown the proportion of the company’s revenue that comes from recurring services and consumables to about 80 percent of sales through a combination of steady organic growth and a series of smart acquisitions.

Sales of capital equipment to hospitals and other medical centers account for the remaining 20 percent.

In November 2015, STERIS completed the biggest deal in the company’s history, purchasing UK-based Synergy Health for $2.064 billion. After the deal closed, STERIS relocated its headquarters from the US to the UK.

In addition cost synergies, the blockbuster acquisition gives STERIS a foothold in the international market and creates ample opportunity to cross-sell its services and products to Synergy Health’s legacy operations in Europe.

A defensive revenue profile and exposure to steadily growing demand make STERIS a solid holding in uncertain times.

Our concerns for downside risk in the broader market, however, means that investors should consider easing into this position over time.

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