Steris: Diversified Growth and Margin Strength Position It for Outperformance

In a healthcare market increasingly defined by volatility, Steris plc (NYSE:MED) has emerged as a standout performer, leveraging its dual-engine growth strategy in Healthcare and Applied Sterilization Technologies (AST) to deliver resilient financial results. With 7–10% EPS growth guidance for fiscal 2026 despite $30 million in tariff headwinds, Steris is proving its ability to navigate macroeconomic challenges while capitalizing on recurring revenue streams. Here’s why investors should take notice now.

Segment-Specific Momentum: Healthcare and AST Drive Organic Growth

Steris’ Healthcare segment—its largest division—delivered 10% revenue growth in fiscal 2025, fueled by service and consumables sales, which rose 13% and 6%, respectively. This recurring revenue mix is a margin multiplier: in Q4 2024, Healthcare operating margins expanded to 24.3%, reflecting strong pricing discipline and operational efficiencies. Even as capital equipment sales dipped 4% in the quarter due to industry-wide supply chain constraints, the segment’s service-driven model insulated margins and kept top-line growth on track.

Meanwhile, the AST segment—a high-margin business with 45.5% operating margins in Q4 2024—showed 9% revenue growth in fiscal 2025, driven by surging demand for sterilization services in the medical and pharmaceutical industries. Despite a 43% drop in capital equipment sales in Q4 2024, AST’s focus on recurring service contracts kept the segment’s constant currency organic growth at 10% in Q4 2025. This resilience underscores Steris’ strategy of prioritizing predictable revenue over volatile hardware sales.

Margin Expansion Through Recurring Revenue

Steris’ margin story is built on its recurring revenue flywheel: service and consumables contracts, which now account for over 70% of total Healthcare segment revenue, offer higher margins than capital equipment sales. This shift is paying off:

• Healthcare operating income rose 10% in fiscal 2025, outpacing revenue growth, as pricing power and scale efficiencies kicked in.
• AST’s margin resilience—despite capital equipment headwinds—demonstrates the power of its sterilization-as-a-service model.

The company’s 2026 guidance calls for 6–7% constant currency revenue growth, with margins expanding further as restructuring savings ($25 million annually by 2026) and pricing discipline take hold. Even with tariffs, Steris expects to deliver $9.90–$10.15 EPS in 2026, a 7–10% increase over fiscal 2025’s $9.22.

Cash Flow Sustainability: The Engine of Long-Term Value

Steris’ free cash flow (FCF) has been a consistent bright spot, growing from $620 million in fiscal 2024 to $787 million in fiscal 2025, driven by working capital improvements and higher operating margins. This cash machine is critical for:
1. Debt reduction: Steris’ net debt-to-EBITDA ratio fell to 1.8x in 2025, down from 2.3x in 2023.
2. Share buybacks and dividends: While not currently paying a dividend, the company has returned $400 million to shareholders via buybacks since 2022.

With 2026 FCF guidance of $770 million, Steris is positioned to sustain this capital allocation discipline, even as tariffs and macroeconomic uncertainty loom.

Tariff Resilience: Steris’ Proactive Strategy Mitigates Risks

The $30 million tariff impact on 2026 pre-tax profit—a direct result of U.S.-China trade tensions—is not a dealbreaker. Steris has already begun:
- Shifting production: Relocating manufacturing to Mexico and Europe to bypass tariffs.
- Passing costs: Raising prices on non-tariff-affected products by 2–3%.
- Leveraging scale: Its global footprint allows it to source materials more efficiently than smaller peers.

This proactive approach ensures that Steris’ adjusted EPS growth target of 7–10% remains intact.

Why Buy Now? Diversification and Valuation Advantage

Steris’ diversified exposure—spanning healthcare infection control, sterilization services, and life sciences equipment—gives it an edge over single-sector peers. Its recurring revenue streams (60% of total revenue) act as a buffer against economic cycles, while its high-margin AST segment provides a steady profit engine.

At a current P/E of 20x versus its five-year average of 23x, Steris is undervalued relative to its growth trajectory. With $7 billion in cash flow over the next five years, the stock offers a rare blend of safety and upside in a volatile healthcare market.

Conclusion: A Compelling Buy at Current Levels

Steris’ segment-specific execution, margin discipline, and cash flow scalability make it a standout investment in healthcare infrastructure. Even with tariffs, its 2026 guidance reflects management’s ability to deliver growth through operational excellence. With shares down 15% year-to-date on broader market fears, now is the time to position for the recovery in healthcare capital spending and Steris’ leadership in infection control and sterilization.

Investors should act quickly: as Steris’ restructuring savings kick in and tariffs are mitigated, this stock is primed to outperform peers in 2026 and beyond.