On Thursday, Wolfe Research adjusted its price target on STERIS (NYSE:STE), a leading provider of infection prevention and other procedural products and services. The firm's price target was raised to $245 from $235 while maintaining an Outperform rating on the company's shares.
The firm's analyst cited several reasons for the positive outlook on STERIS. The new target price is based on a 24 times multiple of the projected calendar year 2025 earnings per share (EPS). This valuation is a 15% premium over the next twelve months' price-to-earnings (P/E) ratio for the S&P 500, which the analyst believes is justified given STERIS's historical performance.
STERIS's stock has traditionally traded at parity with the medical equipment and supplies sub-index S&P573's next twelve months earnings. The sub-index is currently trading at approximately 26 times P/E multiple. The analyst's target price for STERIS reflects a slightly more conservative estimate, being two turns below the S&P573's P/E multiple.
The analyst's approach included a sanity check using a long-run discounted cash flow (DCF) model. This model assumes a mid-single digit organic annual revenue growth and an adjusted EBIT margin that improves by more than 50 basis points per year.
It also incorporates a 4%+ terminal growth rate, in line with long-term expectations for healthcare spending growth, and a discount rate of around 9%. The DCF model output was found to be consistent with the proposed target price.
The firm's positive stance on STERIS shares is supported by a comprehensive analysis that takes into account the company's historical trading patterns, market benchmarks, and fundamental financial projections. The target price adjustment reflects confidence in the company's ability to grow and maintain profitability in the coming years.
InvestingPro Insights
Following Wolfe Research's updated price target on STERIS, a dive into the InvestingPro platform reveals additional insights that support the firm's optimistic stance. STERIS's market capitalization stands strong at $21.41 billion, and the company is trading at a P/E ratio of 37.62, which is high but may be justified by its consistent performance. Notably, the company has raised its dividend for 20 consecutive years, a testament to its financial stability and shareholder-friendly approach. Moreover, analysts expect STERIS's net income to grow this year, providing further confidence in the company's future profitability.
Key financial metrics from InvestingPro show a robust revenue growth of 13.04% over the last twelve months as of Q3 2024, with a gross profit margin of 43.64%, indicating efficient operations. The company also maintains a solid operating income margin of 15.7%, showcasing its ability to manage expenses effectively. These metrics illustrate a company that is not only growing but also managing its growth profitably.
Investors seeking additional insights can find more InvestingPro Tips on the platform, which includes a total of 9 tips for STERIS. For those interested in a deeper analysis, a yearly or biyearly Pro and Pro+ subscription is available, and by using the coupon code PRONEWS24, an additional 10% off can be obtained.
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