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Stryker In Oversold Territory
Medical device giant Medtronic (NYSE:MDT) sent the medical device industry on edge after reporting weaker-than-expected sales during its first quarter. Shares of Stryker (NYSE:SYK) fell in sympathy, and though it also sells products related to spinal surgeries, its orthopedic device unit should continue to hold up well despite murkier industry conditions.
IN PICTURES: 5 Tips To Reading The Balance Sheet
Most Recent Quarterly Review
Stryker's most recent earnings release was in late July. Sales grew 6.9% to $1.8 billion during its second quarter when removing the effects of currency fluctuations as flagship orthopedic device sales for hip, knee, trauma and spinal surgeries increased a modest 1.4%. The MedSurg equipment division sells surgical equipment and systems and reported a 15.9% jump in sales.
Domestic sales were actually stronger than international ones, rising 10.8% versus 1.8%. Domestic sales accounted for 66% of sales as the company cited strong shipments of implant and surgical equipment. By product segment, the orthopedic unit accounted for 59% of quarterly sales as trauma device sales grew an impressive 13%.
Stryker was able to leverage respectable top-line growth into a 9.5% improvement in earnings to $319 million, or 80 cents per diluted share. Operating cash flow generation improved markedly, rising 79% to $326.7 million on an improvement in working capital efficiencies.
Historical Trends and Outlook
Domestic healthcare reforms and more challenging conditions internationally have definitely curtailed Stryker's growth recently. However, its most recent quarter and full-year outlook indicate trends are picking up. The company is unlikely to grow at a breakneck pace as in years past, but should still be able leverage high single digit sales growth into mid-teen earnings and cash flow expansion.
Additionally, it's orthopedic sales have strong demographic trends on their side and are less risky than the heart-related devices sold by Medtronic, St Jude (NYSE:STJ), and certain divisions of Johnson & Johnson (NYSE:JNJ).
For the full year, Stryker expects sales growth between 5% and 8% and earnings growth between 8% and 12% to a range of $3.20 to $3.30 per diluted share.
The Bottom Line
A pessimistic stock market and weak Medtronic results have sent shares of Stryker back toward their lows over the last year. The shares now trade at a forward P/E of 13.2, which is a very reasonable multiple given demand should continue be strong in both of its divisions. It also means minimal growth is discounted in the current valuation.
The firm can also boost organic growth with bolt-on acquisitions, as it did recently when it announced it was buying privately-held Gaymar Industries for $150 million. Stryker already had an agreement to sell Gaymar's ulcer-related products, which accounted for $14 million of Gaymar's $77 million in sales last year. There is also speculation that Stryker may buy the pain management business of Boston Scientific (NYSE:BSX), which would represent a sizeable acquisition. (Learn about investing in this sector, see Investing In Medical Equipment Companies.)
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IN PICTURES: 5 Tips To Reading The Balance Sheet
Most Recent Quarterly Review
Stryker's most recent earnings release was in late July. Sales grew 6.9% to $1.8 billion during its second quarter when removing the effects of currency fluctuations as flagship orthopedic device sales for hip, knee, trauma and spinal surgeries increased a modest 1.4%. The MedSurg equipment division sells surgical equipment and systems and reported a 15.9% jump in sales.
Domestic sales were actually stronger than international ones, rising 10.8% versus 1.8%. Domestic sales accounted for 66% of sales as the company cited strong shipments of implant and surgical equipment. By product segment, the orthopedic unit accounted for 59% of quarterly sales as trauma device sales grew an impressive 13%.
Stryker was able to leverage respectable top-line growth into a 9.5% improvement in earnings to $319 million, or 80 cents per diluted share. Operating cash flow generation improved markedly, rising 79% to $326.7 million on an improvement in working capital efficiencies.
Domestic healthcare reforms and more challenging conditions internationally have definitely curtailed Stryker's growth recently. However, its most recent quarter and full-year outlook indicate trends are picking up. The company is unlikely to grow at a breakneck pace as in years past, but should still be able leverage high single digit sales growth into mid-teen earnings and cash flow expansion.
Additionally, it's orthopedic sales have strong demographic trends on their side and are less risky than the heart-related devices sold by Medtronic, St Jude (NYSE:STJ), and certain divisions of Johnson & Johnson (NYSE:JNJ).
For the full year, Stryker expects sales growth between 5% and 8% and earnings growth between 8% and 12% to a range of $3.20 to $3.30 per diluted share.
The Bottom Line
A pessimistic stock market and weak Medtronic results have sent shares of Stryker back toward their lows over the last year. The shares now trade at a forward P/E of 13.2, which is a very reasonable multiple given demand should continue be strong in both of its divisions. It also means minimal growth is discounted in the current valuation.
The firm can also boost organic growth with bolt-on acquisitions, as it did recently when it announced it was buying privately-held Gaymar Industries for $150 million. Stryker already had an agreement to sell Gaymar's ulcer-related products, which accounted for $14 million of Gaymar's $77 million in sales last year. There is also speculation that Stryker may buy the pain management business of Boston Scientific (NYSE:BSX), which would represent a sizeable acquisition. (Learn about investing in this sector, see Investing In Medical Equipment Companies.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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