Following the completion of the much talked $1.9 billion alliance of medical equipment manufacturer Steris Plc STE and UK-based outsourced sterilization services provider Synergy Health, recently Steris revealed an optimistic fiscal 2016 outlook for the combined entity. Shares of the company accordingly rose 4% to close at $74.01 yesterday.
Although the merger is still at an early stage, management is upbeat about the healthy progress in the integration procedure, which is also in line with the company’s expectation. Per management, the fiscal 2016 guidance represents solid underlying performance from both the company’s businesses and a cost synergy leverage of a partial year owing to the combination and recent tax legislation.
2016 Outlook
For fiscal 2016, STERIS expects to deliver adjusted EPS in the range of $3.48–$3.55 along with revenue growth of 21–22%. The current 2016 Zacks Consensus Estimate for STERIS is pegged at $3.31 for EPS (below the predicted range) and $ 2.25 billion for revenues.
Moreover, the company expects an adjusted effective tax rate of approximately 27.5% for fiscal 2016, while free cash flow is anticipated to be approximately $155 million. The free cash flow outlook includes about $45 million in acquisition-related expenses and approximately $135 million in capital expenditures.
Notably, this guidance includes three months’ impact of the R&D tax extenders and medical device tax legislation passed last week. The outlook also reflects the forward rates for currencies as of Nov 30, 2015. Moreover, STERIS has assumed a weighted average of 71.2 million diluted shares outstanding in its calculations of fiscal 2016 adjusted EPS, while the same for the fourth quarter of fiscal 2016 is estimated to be approximately 86.5 million.
New Segments
Per management, effective from the third quarter of fiscal 2016, STERIS will operate in four business segments: Healthcare Products, Healthcare Specialty Services, Applied Sterilization Technologies and Life Sciences.
The Healthcare Products segment will offer infection prevention and procedural solutions for healthcare providers worldwide, including capital equipment and related maintenance and installation services, as well as consumables.
The Healthcare Specialty Services segment will offer a range of specialty services for healthcare providers including hospital sterilization services, instrument and scope repairs, and linen management.
The Applied Sterilization Technologies segment will provide contract sterilization and laboratory services for medical device manufacturers, pharmaceutical customers and others.
Lastly, the Life Sciences segment will offer capital equipment and consumable products, and equipment maintenance and specialty services, for pharmaceutical manufacturers and research institutions worldwide.
The Road Ahead
The Synergy health acquisition has enabled STERIS to expand its already robust presence in North America to the developed markets of Europe as well as the emerging markets of Asia-Pacific and Latin America. With the global healthcare market currently valued at $9.59 trillion (according to PricewaterhouseCoopers), we expect STERIS to capture a larger share of this huge market potential, going ahead. STERIS’ optimistic fiscal 2016 outlook further reinforces our confidence in the company.
Zacks Rank
Currently, STERIS has a Zacks Rank #1 (Strong Buy). Some other top-ranked medical stocks are Masimo Corporation MASI, ABIOMED, Inc. ABMD and EnteroMedics Inc. ETRM. While Masimo sports a Zacks Rank #1, ABIOMED and EnteroMedics carry a Zacks Rank #2 (Buy).
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