Summary
- Sotera Health Company went public in November 2020, raising around $1.1 billion in gross proceeds in a U.S. IPO.
- The firm provides sterilization and lab testing services worldwide.
- Sotera Health stock has seen volatility due to product liability and other legal claims against the firm.
- Until we gain visibility into remaining claims, I'm on Hold for Sotera Health Company stock.
A Quick Take On Sotera Health
Sotera Health Company ( SHC ) went public on November 19, 2020, raising approximately $1.1 billion in gross proceeds in an IPO that was priced at $23.00 per share.
The company provides sterilization and lab testing services to medical device and pharmaceutical companies.
While SHC stock rebounded in January with the settlement of Illinois claims, there are still substantial uncertainties with respect to the company and its legal liabilities.
Until those uncertainties are resolved, I’m on Hold for SHC.
Sotera Health Overview
Broadview Heights, Ohio-based Sotera was founded to provide end-to-end sterilization, microbiological and analytical testing services.
Management is headed by Chairman and CEO Michael Petras, Jr., who has been with the firm since 2016 and was previously CEO of Post-Acute Solutions at Cardinal Health.
In addition, the firm provides advisory services for pharmaceutical and food processors worldwide.
The company counts "more than 40 of the top 50 medical device companies and eight of the top ten global pharmaceutical companies (based on revenue)" as customers.
It has a total of more than 5,800 customers in over 50 countries.
Sotera’s Market & Competition
According to a 2020 market research report , the global market for sterilization services was an estimated $2.7 billion in 2019 and is forecast to reach $4.4 billion by 2027.
This represents a forecast CAGR of 6.3% from 2020 to 2027.
The main drivers for this expected growth are a continued rise in the number of elderly people along with chronic illnesses and development opportunities in emerging countries.
Also, further growth is expected to come from the medical device industry, which is seeing stringent regulatory requirements driving sterilization service demand.
Major competitive or other industry participants include:
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Applied Sterilization Technologies (STERIS) ( STE )
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Regional/smaller outsourced sterilization service firms
Sotera’s Recent Financial Performance
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Total revenue by quarter has risen according to the following chart:
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Gross profit margin by quarter has produced the following trajectory:
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Selling, G&A expenses as a percentage of total revenue by quarter have fluctuated per the chart below:
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Operating income by quarter has trended unevenly higher in recent quarters:
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Earnings per share (Diluted) have remained positive in the last seven quarters:
(All data in the above charts is GAAP.)
In the past 12 months, SHC’s stock price has dropped 22.4% vs. that of Steris’ fall of 21.6%, as the chart indicates below:
Valuation And Other Metrics For Sotera Health
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 6.7 |
Enterprise Value / EBITDA | 18.2 |
Revenue Growth Rate | 9.5% |
Net Income Margin | 12.3% |
GAAP EBITDA % | 36.9% |
Market Capitalization | $5,052,661,525 |
Enterprise Value | $6,686,341,220 |
Operating Cash Flow | $242,386,000 |
Earnings Per Share (Fully Diluted) | $0.44 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be STERIS plc; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | STERIS plc | Sotera Health Company | Variance |
Enterprise Value / Sales | 4.5 | 6.6 | 44.7% |
Enterprise Value / EBITDA | 16.3 | 17.8 | 9.0% |
Revenue Growth Rate | 12.6% | 9.5% | -24.6% |
Net Income Margin | -0.6% | 12.3% | --% |
Operating Cash Flow | $712,880,000 | $242,386,000 | -66.0% |
(Source - Seeking Alpha.)
Commentary On Sotera Health
In its last earnings call ( Source - Seeking Alpha ), covering Q3 2022’s results, management highlighted the negative macroeconomic environment the firm is experiencing, albeit with some areas of improvement.
Its Sterigenics segment saw "solid demand" as it sought to "offset inflation pressures being felt around the globe."
The segment also made progress on its capacity expansion and facility enhancement initiatives.
As to its financial results, total revenue grew 10% year-over-year, while adjusted EBITDA rose 7.3%.
Adjusted EBITDA usually excludes stock-based compensation and one-time items.
Operating income has trended slightly higher recently, while earnings per share have trended lower in the last few quarters.
For the balance sheet , the firm finished the quarter with $164.7 million in cash, equivalents, and short-term investments and $1.75 billion in long-term debt.
Over the trailing twelve months, free cash flow was $90.5 million, of which capital expenditures accounted for $151.9 million. The company paid $18.3 million in stock-based compensation in the last four quarters.
Looking ahead, management expects full year 2022 revenue growth to be around 7.5% at the midpoint of the range, and adjusted EBITDA to grow by 5% at the midpoint.
Regarding valuation, the market is valuing SHC at an Enterprise Value / EBITDA multiple of 17.8x, slightly higher than competitor STERIS’ 16.3x multiple, likely due to SHC’s positive net income margin.
The primary risks to Sotera Health Company’s outlook are continued slow macroeconomic dynamics for certain of its segments as well as additional legal claims against the firm, such as class actions by shareholders who accuse management of misleading investors related to its product liability characteristics from the use of Ethylene Oxide.
While Sotera Health Company stock rebounded in January with the settlement of Illinois claims, there are still substantial uncertainties with respect to the company and its legal liabilities.
Until those uncertainties are resolved, I’m on Hold for Sotera Health Company.
For further details see:
Sotera Health Continues Capacity Expansion Efforts