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A Rare Stryker Buying Opportunity
Stryker (NYSE:SYK) is like death and taxes - it's an inevitable "steady Eddy" in the orthopedic and medical equipment space. The stock is always a bit expensive and yet it pretty much always rewards its loyal shareholders.
Except for right now. For only the third time in 20 years, there's actually a real downward trend in the Stryker stock price. So, let's take a look at the Stryker story today and see what's different.
The Checklist
• Double-digit revenue growth and 20% earnings growth? Check.
That's been the story seemingly forever around here. For this quarter, the company booked 12% revenue growth (in constant currency) as a strong performance in the MedSurg business (endoscopes, instruments, hospital beds and the like) buoyed a weaker performance in the larger orthopedics business. Strong expense control and lower taxes delivered the rest.
• Wiggles and wobbles in hip, knee, and spine market share? Check.
Stryker competes with the likes of Zimmer (NYSE:ZMH), Medtronic (NYSE:MDT), Smith & Nephew (NYSE:SNN), Exactech (Nasdaq:EXAC) and Wright Medical (Nasdaq:WMGI), and somebody's share is always moving up, while somebody else's share is moving down. New products will come out in 18 or 24 months and the numbers will get stirred up again.
• Analysts predicting the inevitable end of Stryker's run of 20% growth? Check.
About 50% of the analysts covering Stryker have it at 'hold' or 'neutral', and there's a lot of chatter about the company will be unable to produce the traditional 20% growth in 2009 and maybe 2010 as well. This isn't new; I've been hearing the "Stryker can't grow at 20% forever" story for more than 10 years. Sooner or later they'll be right, but so what? There's plenty of great companies out there that haven't seen 20% growth since the Eisenhower years. (For more on analyst predictions, read Analyst Recommendations: Do Sell Ratings Exist?)
• Delays on OP-1? Check.
Waiting for this bone growth factor (used to help promote bone fusion, especially in spinal procedures) has been like waiting for Godot. I remember the company getting a Humanitarian Device Exemption from the FDA back in 2001, and yet the odyssey still continues. Maybe it'll eventually be another growth driver for the company, or maybe it'll be a "nice to have" niche product. Either way, I'll believe it when I see the approval letter.
What's Really New
OK, all of that cheekiness aside, some things are changing for this company. Management has to deal with some FDA warning letters, and that means investing millions of dollars in better compliance systems across the company. Competitors do seem to have the upper hand in the hip business for now, but that could change again over time. (Read Measuring The Medicine Makers to learn more about the FDA and it's approval process.)
What I wonder most about is the near-term impact of the economy. While it's true that a person can't put off a heart attack until the economy gets better, people can put off surgeries to their spine, knees or hips. Spinal surgery tends to be a younger person's malady (less often reimbursed by Medicare), so the prospect of making the co-payment today may lead to some delays and some lost revenue for Stryker and Medtronic. Then again, people may fear for their jobs (and their health insurance) and may try to get those surgeries now.
Along those lines, I do worry a bit about hospital budgets and the impact on the MedSurg business. On the plus side, Stryker doesn't sell a lot of high-priced items - like, say Varian (NYSE:VAR) or Siemens (NYSE:SI) - but hospital budgets are still likely to come under pressure. As a lot of hospital capital budgets come from charitable giving, administrators may be pushed to scrimp, save and move money around various budget items and that could have some marginal impact on Stryker.
The Bottom Line
I know that sooner or later Stryker will be unable to keep up the 20% pace of growth (unless they acquire a fast-growing company in a field like, say, surgical robotics). I also know that Stryker will have to go through a painful period as investors readjust their growth expectations (Medtronic has been through this too). But none of that means that this can't still be a solid, dependable growth holding in a core stock portfolio.
Except for right now. For only the third time in 20 years, there's actually a real downward trend in the Stryker stock price. So, let's take a look at the Stryker story today and see what's different.
The Checklist
• Double-digit revenue growth and 20% earnings growth? Check.
That's been the story seemingly forever around here. For this quarter, the company booked 12% revenue growth (in constant currency) as a strong performance in the MedSurg business (endoscopes, instruments, hospital beds and the like) buoyed a weaker performance in the larger orthopedics business. Strong expense control and lower taxes delivered the rest.
• Wiggles and wobbles in hip, knee, and spine market share? Check.
Stryker competes with the likes of Zimmer (NYSE:ZMH), Medtronic (NYSE:MDT), Smith & Nephew (NYSE:SNN), Exactech (Nasdaq:EXAC) and Wright Medical (Nasdaq:WMGI), and somebody's share is always moving up, while somebody else's share is moving down. New products will come out in 18 or 24 months and the numbers will get stirred up again.
• Analysts predicting the inevitable end of Stryker's run of 20% growth? Check.
About 50% of the analysts covering Stryker have it at 'hold' or 'neutral', and there's a lot of chatter about the company will be unable to produce the traditional 20% growth in 2009 and maybe 2010 as well. This isn't new; I've been hearing the "Stryker can't grow at 20% forever" story for more than 10 years. Sooner or later they'll be right, but so what? There's plenty of great companies out there that haven't seen 20% growth since the Eisenhower years. (For more on analyst predictions, read Analyst Recommendations: Do Sell Ratings Exist?)
Waiting for this bone growth factor (used to help promote bone fusion, especially in spinal procedures) has been like waiting for Godot. I remember the company getting a Humanitarian Device Exemption from the FDA back in 2001, and yet the odyssey still continues. Maybe it'll eventually be another growth driver for the company, or maybe it'll be a "nice to have" niche product. Either way, I'll believe it when I see the approval letter.
What's Really New
OK, all of that cheekiness aside, some things are changing for this company. Management has to deal with some FDA warning letters, and that means investing millions of dollars in better compliance systems across the company. Competitors do seem to have the upper hand in the hip business for now, but that could change again over time. (Read Measuring The Medicine Makers to learn more about the FDA and it's approval process.)
What I wonder most about is the near-term impact of the economy. While it's true that a person can't put off a heart attack until the economy gets better, people can put off surgeries to their spine, knees or hips. Spinal surgery tends to be a younger person's malady (less often reimbursed by Medicare), so the prospect of making the co-payment today may lead to some delays and some lost revenue for Stryker and Medtronic. Then again, people may fear for their jobs (and their health insurance) and may try to get those surgeries now.
Along those lines, I do worry a bit about hospital budgets and the impact on the MedSurg business. On the plus side, Stryker doesn't sell a lot of high-priced items - like, say Varian (NYSE:VAR) or Siemens (NYSE:SI) - but hospital budgets are still likely to come under pressure. As a lot of hospital capital budgets come from charitable giving, administrators may be pushed to scrimp, save and move money around various budget items and that could have some marginal impact on Stryker.
The Bottom Line
I know that sooner or later Stryker will be unable to keep up the 20% pace of growth (unless they acquire a fast-growing company in a field like, say, surgical robotics). I also know that Stryker will have to go through a painful period as investors readjust their growth expectations (Medtronic has been through this too). But none of that means that this can't still be a solid, dependable growth holding in a core stock portfolio.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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