STERIS (STE): A High-Conviction Buy Amid Strong Execution, Margin Expansion, and Elevated Free Cash Flow

STERIS (NYSE:STE) has emerged as a standout performer in the healthcare and life sciences sectors, driven by robust revenue growth, margin expansion, and strategic momentum. Despite a temporary dip in Q3 2025 free cash flow, the company's long-term fundamentals remain compelling, with analysts and management expressing confidence in its ability to deliver durable growth. For investors seeking exposure to high-margin, innovation-driven markets, STE presents a compelling case for a high-conviction buy.

Strong Execution and Margin Expansion

STERIS reported Q3 2025 revenue of $1.46 billion, a 9.9% year-on-year increase that exceeded Wall Street's estimates by 2%, according to a Yahoo Finance report. This growth was fueled by strong performance in both the Healthcare and Life Sciences segments, with non-GAAP earnings per share (EPS) of $2.47 beating analyst expectations by 5.1%, as reported in a Globe and Mail press release. The company's operating margin expanded to 18.2%, up from 16.5% in the same quarter last year, reflecting operational efficiency and pricing power, as reported in the Globe and Mail press release.

The margin improvement is particularly noteworthy given macroeconomic headwinds. STERIS's ability to navigate inflationary pressures while maintaining profitability underscores its competitive positioning. Management raised its full-year Adjusted EPS guidance to $10.23 at the midpoint, signaling confidence in sustained momentum, as reported in the Globe and Mail press release.

Addressing Free Cash Flow Concerns

A key point of scrutiny has been the company's negative free cash flow of -$325.9 million in Q3 2025, a stark contrast to the $148.8 million generated in the prior-year period, according to the Yahoo Finance report. However, this anomaly is largely attributable to short-term factors. According to STERIS's fiscal 2025 third-quarter report, the decline was driven by lower-than-expected revenue in the Healthcare segment's capital equipment division and unfavorable foreign currency forward rates through March 31, 2025, as reported in the Steris press release.

Importantly, the company maintains a strong annual free cash flow outlook. For fiscal 2025, STERIS expects to generate approximately $700 million in free cash flow, with capital expenditures projected at $360 million, as reported in the Steris press release. This aligns with its long-term strategy of reinvesting in high-growth areas while maintaining financial flexibility. Analysts at Needham have noted that the company's working capital improvements and organic revenue growth provide a solid foundation for future cash flow resilience, as reported in a Needham analyst note.

Strategic Momentum in High-Margin Segments

STERIS's strategic focus on healthcare and life sciences has positioned it to capitalize on structural tailwinds. The Healthcare segment, which accounts for a significant portion of revenue, is benefiting from increased demand for sterilization and infection prevention solutions in hospitals and ambulatory care settings. Meanwhile, the Life Sciences segment is gaining traction in biopharma and diagnostics, driven by advancements in cell and gene therapy, as reported in the Globe and Mail press release.

Constant currency revenue growth of 8.9% year-on-year in Q3 2025 further reinforces the company's ability to scale in these high-margin markets, as reported in the Globe and Mail press release. With healthcare spending projected to grow globally and life sciences innovation accelerating, STERIS is well-positioned to outperform peers.

Conclusion: A High-Conviction Buy

While short-term volatility in free cash flow may raise eyebrows, the broader narrative for STERIS is one of resilience and strategic clarity. The company's margin expansion, strong revenue growth, and leadership in high-margin healthcare and life sciences segments create a durable competitive moat. With a full-year free cash flow outlook of $700 million and a raised EPS guidance, STE offers a compelling risk-reward profile for investors with a medium- to long-term horizon.

As the healthcare and life sciences industries evolve, STERIS's ability to innovate and execute will likely drive sustained value creation. For those seeking exposure to a company with both operational excellence and strategic momentum, STE is a high-conviction buy.