The market was all smiles when Steris (NYSE:STE) released its Q1 2007 results yesterday. Shares rose 1.9%, largely due to earnings per share coming in at $0.22, beating analyst expectations by one penny.
OK, that's worth something. But if a student performs better than a teacher's expectations, that doesn't mean that student should make the honor roll. Neither should Steris.
Profits at the manufacturer of infection control and prevention products fell 15%. The company blamed costs associated with transferring manufacturing operations to Mexico and stock option expenses. Revenues fell 1%, with the company's life sciences division contributing its own 9% decline, due to timing of in-process capital orders. One bright spot is that this segment reported a 15% higher backlog and lower operating expenses. Health care revenues grew 1%, but management still cites softening demand in U.S. hospital equipment sales. Revenues remained flat at Isomedix, the company's contractual service provider.
Looking ahead, the company projects that its revenue will be at the low end of its previously specified 4%-6% range, and earnings are still expected in the $1.10-$1.20 per diluted share range.
Management's main areas of focus continues to be the continuing transition of manufacturing to Mexico and initialization of a turnaround strategy for Europe, where the company hopes to break even in mid-2008. In other recent news, Steris recently boosted its share repurchase program and garnered FDA approval for a soon-to-be-released new product that's designed to disinfect gastrointestinal instruments.
Goals are good, execution is even better. The company did perform better than many expected, so maybe that's reason enough to show some appreciation. Real share appreciation, however, will come only with all segments advancing. There's not much the company can do to combat fluctuating hospital construction projects, but Steris still has other homework. The company's tasks include outlining a viable strategy for China and transforming its large-space decontamination research into a full-fledged market launch. While investors shouldn't rap the company's knuckles for this quarter's results, Steris still needs to hunker down and perform solidly before becoming the teacher's pet.
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Fool contributor S.J. Caplan does not own any shares of the company. The Fool has a disclosure policy.
