The past six months have been a windfall for Sotera Health Company’s shareholders. The company’s stock price has jumped 74.2%, hitting $19.18 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Sotera Health Company, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Sotera Health Company Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Sotera Health Company. Here are three reasons why SHC doesn't excite us and a stock we'd rather own.

1. Fewer Distribution Channels Limit its Ceiling

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $1.15 billion in revenue over the past 12 months, Sotera Health Company is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Sotera Health Company’s revenue to rise by 4.4%, a deceleration versus its 7.7% annualized growth for the past five years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Sotera Health Company’s margin dropped by 9.7 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. Sotera Health Company’s free cash flow margin for the trailing 12 months was 7.5%.

Final Judgment

Sotera Health Company isn’t a terrible business, but it doesn’t pass our bar. After the recent rally, the stock trades at 21× forward P/E (or $19.18 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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