In an operating room, surgeons trust that every tool is sterile before they begin.

That process starts with cleaning, then uses heat, gas or radiation to kill microbes, followed by checks and secure storage.

If any step fails, patients risk infection.

Sotera Health (SHC) is a leader in the sterilization industry, providing essential services that ensure the safety and regulatory compliance of medical devices, pharmaceuticals, and food products.

The company operates through three segments that together dominate their niche markets.

Sterigenics, its largest division, provides terminal sterilization services critical for medical device manufacturers.

Nordion supplies cobalt-60, the radioactive source used in roughly 30% of single-use medical device sterilization worldwide, and high-activity cobalt for cancer treatment devices like the Gamma Knife.

Nelson Labs rounds out the portfolio with lab testing and validation services. It runs more than 900 microbiological and chemical tests to support product development, regulatory approval and ongoing quality control.

These divisions are integral to healthcare and food supply chains globally, with few viable substitutes.

All these factors combined enabled the company to achieve above 20% Uniform return on assets ”ROA” until 2024.

Sotera’s profitability took a hit in 2024, largely due to a combination of legal expenses and heavy investments in upgrading its facilities.

These costs, while significant, are temporary.

The company has already made progress resolving its legal challenges, and its spending on facility upgrades is expected to decline sharply in the coming year.

The market, however, is pricing in further declines in Sotera’s returns, as if the company’s recent headwinds are permanent rather than one-off charges.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA to further decline to 12% from 13% last year.

Sotera’s strengths remain undeniable.

Its established customer base, secured revenues, and strategic positioning in high-demand markets make it a key player in the sterilization industry.

The temporary setbacks tied to litigation and facility upgrades do little to undermine its long-term potential.

As CapEx moderates and operational improvements take hold, Sotera is positioned to regain its footing.

The ongoing need for sterilization services in healthcare and food supply chains ensures a stable growth trajectory, supported by high barriers to entry in its niche markets.

For investors willing to look past today’s challenges, Sotera offers an opportunity to buy into an undervalued essential service provider.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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