McIntyre Partnerships: Sotera Health Company ($SHC) Investment Case
Introduction: In their Q4 2024 investor letter, McIntyre Partnerships discusses their continued investment in Sotera Health Company ($SHC), highlighting it as a position that experienced significant decline but remains a high-conviction holding. Despite underperforming their benchmark in 2024—their first year of underperformance since 2019—McIntyre maintains optimism about their portfolio positioning entering 2025. The letter emphasizes their long-term investment approach and willingness to maintain positions through short-term volatility when the underlying thesis remains intact. SHC was identified as one of the main contributors to the fund’s underperformance, with the stock falling 24% during the year.
Investment Highlight: Sotera Health Company ($SHC)
Business Overview
- Provider of outsourced medical device and pharmaceutical sterilization services
- Part of a duopoly market structure with high barriers to entry
- Operates in mission-critical segment with high customer switching costs
Market Position
- One of only two scaled providers in the outsourced sterilization market
- Diversified across major medical device and pharmaceutical manufacturers
- 100% retention rate with top customers
- Product cost represents only ~1-5% of customers’ cost of goods sold
Performance Analysis
- Business Quality Metrics:
- Consistently grown sales at close to 10% historically
- Current growth rate of approximately 5% due to customer destocking
- Impressive ~55% EBITDA margin
- Strong pricing power due to mission-critical nature of services
- Valuation Assessment:
- Trading below 10x 2025 EV/EBITDA
- Trading at 13x 2025 EPS
- Historical valuation consistently over 18x EV/EBITDA and 25x P/E
- Significant discount to intrinsic value
Current Challenges
- Litigation concerns, particularly new cases in California
- Share price fell from $17 to $11 in March 2024 following litigation news
- Market implied almost $2B present value on CA litigation (with only 29 plaintiffs)
- Customer destocking affecting short-term growth rates
Historical Context
- Previously settled 870 cases in Illinois for $408 million
- Settled 79 claims in Georgia for $35 million
- McIntyre believes market significantly overestimates liability risks
Growth Outlook
- Management expects gradual volume improvement throughout 2025
- Destocking headwinds fading according to recent management comments
- Potential return to historical EBITDA growth of ~10% as volumes recover
Valuation Opportunity
- Current valuation significantly below historical trading range
- No fundamental changes to business model or competitive position
- Company reduced debt by ~5% during the year
- McIntyre expects “material reweight” as volumes recover
Other Key Points
- No increase in competition or loss of customers
- No technology changes that would impact the business
- Management transparency about destocking issues and guidance
- Continued focus on debt reduction
McIntyre Partners views Sotera Health as a high-quality business temporarily affected by exaggerated legal concerns and market downturns, creating an attractive entry point. They emphasize the company’s duopoly market position, mission-critical products, high margins, and potential return to historical growth rates as destocking headwinds fade.
Click here for the full investor letter.
Disclaimer: The information provided in this blog post is for informational and educational purposes only and does not constitute financial, investment, or other professional advice. The content is based on a third-party investor letter and does not represent an endorsement, recommendation, or solicitation to buy or sell any particular security or investment product mentioned.
Investing involves risk, including the potential loss of principal. Past performance is not indicative
Disclaimer: Third party content is provided for informational purposes only and should not be construed as an offer to sell or a solicitation of an offer to buy or sell any security. Third party content is not intended to serve as a recommendation to buy or sell any security and is not intended to serve as investment advice. Third party content creators are not affiliated with BBAE Holdings LLC, (“BBAE”) Redbridge Securities LLC (“Redbridge Securities”) or BBAE Advisors LLC (“BBAE Advisors”). All investments involve risk, including the possibility of total loss of principal. For additional important information, please click here.
