Sotera Health: 50% Margin Toll Road Hiding Behind a Litigation Cloud

Samir Patel of Askeladden Capital presented his investment thesis on Sotera Health (US: SHC) at Wide-Moat Investing Summit 2026.

Thesis summary:

Sotera Health provides outsourced sterilization for medical devices and pharma, which Samir characterizes as a 50% margin toll road in healthcare. Sterilization is 1-2% of product cost but gates shipment; unsterilized product cannot be sold. FY2025 revenue was $1.16B with $594M adjusted EBITDA, a 51.0% margin, up from roughly $400M of EBITDA during COVID. Sterigenics (outsourced sterilization, 65% of revenue, 70% of EBITDA) and Nordion (the only Western supplier of cobalt-60, 16%/18%) carry the thesis; Nelson Labs testing (19%/12%) is secondary.

Samir frames the moat as layered and self-reinforcing. Failure is catastrophic on a tiny line item, the airplane-bolt model. FDA files often specify the method, facility, and sometimes chamber, so re-validation runs $1-3M and 18-36 months, reinforcing 3-5 year take-or-pay contracts. The outsourced market is a rational duopoly with STERIS at roughly 80% combined share and 95-97% EtO utilization. Freight can be 2-5x the sterilization cost, localizing competition. Nordion’s cobalt-60 monopoly supplies even STERIS. These layers yield 3-4% pricing plus low-single-digit volume, 5-7% organic growth every year since 2005.

The discount stems from a five-year stretch Samir calls the money pit. EtO emissions claims produced a $363M Illinois verdict in 2022 and a $408M Willowbrook settlement; Georgia courts have since granted summary judgment, leaving California, about 120 claims, as the wildcard. Cumulative litigation cost roughly $750M. Front-loaded NESHAP emissions-control capex and a once-in-20-years Nordion cobalt-60 project absorbed nearly all OCF, while the private-equity sponsor sold down and has now exited.

Samir sees an inflection. Consolidated capex peaks in 2026 near a $175-225M midpoint, then falls to about $110M in 2027 as greenfield and regulatory spend roll off, converting the margin into FCF. He sizes remaining litigation at roughly $225M, about 10% of debt and 5% of market cap, below what has been paid. The regulatory spend may widen the moat; one large OEM has decided to outsource all in-house volume to Sterigenics.

The shares recently traded near $16, about 11.2x EBITDA and 19.5x EV/NOPAT. Samir’s base-case fair value is roughly $22-23, about 14-15x EBITDA or 25x NOPAT, with upside to about $26 if outsourcing and Nordion volume tailwinds hit. STERIS, in his view the weaker business, has historically traded near 15x EBITDA. From 2027 he expects a 5% FCF yield plus 5-7% growth, a low-teens compounder without re-rating, and a 20-25% IRR over two to three years if the multiple re-rates as the overhangs clear.

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About the instructor:

Samir Patel manages Askeladden Capital, the investment advisor to separately managed accounts, utilizing a concentrated, long-only, value-oriented small-cap strategy.

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