Friday, December 5, 1997

Steris Corp.
(Nasdaq: STRL)
Phone: 214-630-6006
Price (12/4/97): $49 3/16


HOW DID IT DOUBLE?

In January of this year, medical sterilization equipment maker Steris announced that earnings would fall short of expectations for the third quarter. The stock plunged from over $43 to under $23 per share. It was a classic example of an earnings shortfall leading to trouble.

The earnings shortfall was related to the acquisition of AMSCO completed earlier in the year. It was a case of indigestion related to swallowing a larger company. Steris reassured investors at the time of the shortfall announcement that estimates for the upcoming fiscal year remained unchanged.

In the fourth quarter report, Steris beat earnings estimates by 10% and the ascent began. The subsequent two earnings reports have also bested estimates. During that six-month period, Steris has completed the acquisition of Joslyn Sterilizer and Isomedix, both of which are accretive to the bottom line.

When a company finds trouble from a one-time occurrence, there is a chance for productive bottom fishing and the result can be a Double.

BUSINESS DESCRIPTION

Steris makes systems to sterilize endoscopes and other equipment used in non-invasive surgical procedures. The company also makes standard sterilization equipment, including autoclaves, and sells surgical tables and the like.

The Isomedix unit is involved with the treatment of beef to prevent toxigenic E. Coli. The company also makes systems to handle hazardous waste. It even bought Calgon Vestal late last year. This company makes antiseptic soaps for handwashing. Steris products are ubiquitous in most hospitals.

The company is on Forbes' list of America's fastest growing companies.

FINANCIAL FACTS

Income Statement
12-month sales: $650 million
12-month income: $56.6 million*
12-month EPS: $1.61*
Profit Margin: 8.7%*
Market Cap: $1726.5 million
(*Excludes non-recurring items)

Balance Sheet
Cash: $35.8 million
Current Assets: $334.6 million
Current Liabilities: $195.5 million
Long-term Debt: $153.7 million

Ratios
Price-to-earnings: 30.6
Price-to-sales: 2.7

HOW COULD YOU HAVE FOUND THIS DOUBLE?

It would be easy to be smug and say that investors following the recommendation I made in the Motley Fool publication Industrial Evolution 1997 could have found this double. The problem is that I was bullish on the company at $35 and it fell promptly to $23. My idea wasn't looking so good.

In February, at the stock's nadir, a Forbes column recommended avoiding the stock, saying it had more downside ahead. An investor stepping up to the plate at the stock's low would have been fighting conventional wisdom.

Once the company beat estimates for the fourth quarter, an investor could have sensed opportunity. Any discussion with healthcare professionals involved in surgery or endoscopy could have impressed the investor with the company's presence in the sterilization market. The company is the clear leader. As more gadgets are used to do procedures, the need for Steris' systems rises.

One way to find a double is to find a dominant company with a temporary setback. These are often quintessential buying opportunities.

WHERE TO FROM HERE?

Steris doesn't look as cheap today as when I looked at it one year ago. Earnings estimates for the coming fiscal year are for $2.24 a share. Long-term growth is estimated at 20%. Using the PEGulator, I get a PEG of 1.22. The YPEG valuation is $45. The stock looks fairly valued at present. The price-to-sales ratio of 2.5 is not cheap, although it is not outrageous either.

Steris is a dominant company in its industry. The market for sterilization equipment will continue to be strong as minimally invasive surgical procedures expand. Steris is a good stock to consider on any market pullbacks or short-term drops. But like so many good companies in today's market, at current prices Steris is not a bargain.

--Mark Weaver, MD
(MWEAV@aol.com)


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