STERIS plc (STE)

Total return at 5 years: 11.3%/year = 10.0% appreciation + 1.3% dividend. The target price ($352) is ex-dividend; the $17 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $263 · Multiples $298) exceeds the market price ($219).

Today — fairly valued: at $219 trades ~26.4% below its value discounted to today (~$298); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($352) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$186.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($219) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (2.6%/year) than we project (6.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1 bn of owner earnings in year 5 (vs ~$1.3 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EBIT (suma de las partes). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM to 30 June 2026 (US$6,037.5 million of revenue, US$1,141.6 million of EBIT). Year 1 starts from the company's own guidance for fiscal 2027, reiterated in the release of 5 August 2026: reported revenue +7-8% and adjusted earnings per share between US$11.10 and US$11.30 (that quarter's 10-Q is already filed and ingested into XBRL, so the TTM needs no rebase; all the release adds is the guidance). The base case uses the midpoint (+7.5%) and decelerates smoothly to 6.0% by year 5, in line with the recent organic trajectory (8.7% in fiscal 2026, 8.4% over the last twelve months). The company is valued as a sum of the parts across its three segments —Healthcare, AST and Life Sciences—, each of a different nature with different competitors: the blended base case multiple (~19.2× on EBIT) results from weighting Healthcare at 19×, AST at 21× (the highest-margin segment with the most defensible moat, given single-source materials and the regulatory barriers of contract sterilization) and Life Sciences at 17× (smaller and more cyclical), by each one's revenue weight at year 5. The bear and bull cases do not disaggregate by segment: they use a compressed (~16.2×) or expanded (~21.2×) blended multiple on the same consolidated EBIT. The model uses explicit buybacks (a share path of ~1%/year) rather than accumulating cash, funded with the ~37% of free cash flow the company retains after dividends and buybacks, consistent with the real reduction in diluted shares between fiscal 2023 and 2027.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $352 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $219, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $352 in 5 years plus $17 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $298. Against the current market price ($219), the margin of safety is 26.4% (trades below the maximum → there is margin) and the total return at that price would be 11.3% annually.

• Current multiple vs band. Consolidated EV/EBIT trailing twelve months (20×) is near the top of the med-tech band (16x-22x).
• Expected 5-year return. The base case compounds at a more moderate blended multiple by segment, with a Undervalued annual return before dividends.
• Dividend yield. ~1.05% on the current price, with a policy of sustained growth for nearly a decade.
• Share buybacks. Net reduction of diluted shares of around 1% annually, funded with operating cash flow, not debt.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (111%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Operating cash flow of US$1,288.5 million over the trailing twelve months, with consistent cash conversion year after year.
• Return on capital. Hovers around the 10% bar (~9.9%), pulled down by acquisition goodwill; segment operating margins are healthy.
• Margins by segment. AST operates at an operating margin near 46%, the highest in the group; Healthcare and Life Sciences run around 25% and 43% respectively.
• Stock-based compensation. Only ~1% of revenue and ~6.8% of free cash flow over the trailing twelve months — a low level, does not distort the valuation metric.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The capital equipment backlog is a leading indicator specific to this business: since a good part of Healthcare and Life Sciences is billed against equipment orders with long lead times, its growth anticipates the pace of revenue in coming quarters before it shows up on the income statement. It does not apply to AST, which is a recurring service with no reported backlog.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Organic growth. 8.7% in fiscal 2026 (7.3% at constant currency), sustained by volume and price across all three segments.
• Fiscal 2027 guidance. The company guides to revenue +7-8% as reported and adjusted EPS between US$11.10 and US$11.30 for the current fiscal year.
• AST growth. The highest-margin segment grew 9.6% in revenue and 12.7% in operating income in the latest fiscal year.
• Biopharmaceutical cycle in Life Sciences. The smallest segment depends on the capex cycle of its biopharmaceutical customers, more volatile than the rest of the group.

• Segment diversification. Three segments of distinct nature (Healthcare, AST, Life Sciences), each with its own customers and competitors, reduces dependence on a single end market.
• Customer concentration. No single customer exceeds 10% of revenue in any segment.
• Regulatory exposure to ethylene oxide. AST depends on an input under growing environmental scrutiny; litigation is already underway in Illinois.
• Growing backlog. The capital equipment backlog in Healthcare and Life Sciences has increased steadily over the last three period ends.
• Recurring revenue. The service and consumables component in Healthcare and AST gives revenue visibility beyond one-time equipment sales.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.9x
• ✓Interest coverage (EBIT / interest)21.7x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 111% of ROIC
• ✕Value creation (ROIC − 10% bar)-0pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.7x — no over-investment
• !Float / working capitalConsumes cash $0.1 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 1.0% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Total debt of US$1,893.6 million against cash of US$482.3 million; net debt of ~US$1,411 million against equity of US$7,206.7 million.
• Interest coverage. Trailing-twelve-month EBIT amply covers estimated interest expense.
• Liquidity. Cash of US$482.3 million and operating cash flow of US$1,288.5 million provide a solvency margin for debt service and guided capex.
• Tax profile. As a plc with Irish tax domicile, it is exposed to a potential U.S. disregard of that organization and to the GloBE global minimum tax rules.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Over the trailing twelve months, STERIS allocated ~27% of free cash flow to dividends, ~37% to share buybacks and retained ~37% for reinvestment (growth capex and cash), with no large acquisitions in the period. This is the capital allocation of a mature company that returns most of its cash to shareholders while continuing to invest in capacity.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Daniel Carestio has spent his entire career at STERIS since 1997, with prior roles as chief operating officer and head of Sterilization, AST and Life Sciences.
• Capital allocation. Combines programmatic buybacks, a growing dividend for over a decade and reinvestment in capacity; no signs of recent value-destroying acquisitions.
• Guidance transparency. The company updates current-year capex and free cash flow in each quarterly release, including the recent upward revision to capex and downward revision to free cash flow.
• Dilution from stock-based compensation. Stock-based compensation runs at just around 1% of revenue, a low level that does not materially erode the shareholder.

• The market already recognizes the quality of the business: the current multiple (20× EV/EBIT trailing twelve months) is near the top of what it pays for a quality med-tech, with no significant visible discount.
• There is no forced-sale or lack-of-coverage event: STERIS has broad analyst coverage and the main recent one-off (the Illinois ethylene oxide litigation) has already been resolved with the agreed settlement.
• Low double-digit organic growth and expanding margins are, to a large extent, already priced in.

No clear source of discount is identified — neither missing buyers nor motivated sellers: the current price reasonably reflects the quality of the business, with a limited margin of safety. It trades at a real discount to value, though short of the required margin of safety.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +5%/year (+30% total): the margin of safety protects the downside. The bull (+15%/year, +100% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Ethylene oxide litigation. The Environmental Protection Agency classified it as a carcinogen in 2016; up to US$48.2 million in Illinois claims has already been agreed, with additional litigation pending and risk of tougher regulatory restrictions ahead.
• Customer consolidation. Hospital and pharmaceutical consolidation increases buyer bargaining power and pressures price.
• Tax risk from Irish domicile. Exposure to a potential U.S. disregard of the Irish organization and to the GloBE global minimum tax rules if the effective rate falls below 15%.
• Trade policy and tariffs. Exposure to tariffs and to the review of the North American trade agreement starting in July 2026.
• Indebtedness. Net debt of ~US$1,411 million that somewhat limits flexibility to fund large acquisitions or a more aggressive return of capital.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC barely matches the 10% bar (the market's opportunity cost), no excess return.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 7% at a multiple/growth of 3.1 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 10% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 3% vs our 7%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +4%/yr, bull-scenario ceiling +14%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, switching costs, cost advantage, efficient scale → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 3%, within what we project (7%) — the story squares with the numbers.