Tickers in this Article: SYK, BSX, ZMH, ATEC, BMTI, NUVA, COV
This is not your father's Stryker (NYSE:SYK) anymore. Although Stryker is still thought of first and foremost as an orthopedics company (and ortho is more than 58% of sales), the company has a sizable surgical/medical equipment business and has been using acquisitions to add more markets to its portfolio. Though Stryker is not liable to turn into a serial acquirer like Integra Life Sciences (Nasdaq:IART) used to be, or Danaher (NYSE:DHR) still is, investors should keep their eyes open to the possibility that Stryker might have a few more tricks up its sleeve and more growth potential than commonly thought.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Quarter Was What We Thought it Was
Stryker pre-announced its fourth-quarter results prior to a major investor conference earlier in January, so there were not many surprises in Tuesday night's report. Revenue rose 8.8% as reported (and 8.6% in constant currency), with the ortho business showing 4.5% growth. Ortho growth was helped by relative strength in hips and trauma, and hampered by weakness in spine. The MedSurg business continues to recover well, with better than 15% growth in this quarter. (For more, see Investing In Medical Equipment Companies.)

Operationally, Stryker has always been a solid performer, and this time around was no different. Gross margin increased 100 basis points (to 68.7%). Stryker ramped up its operating spending, particularly in R&D, and that took almost two and a half points out of the operating margin (after adjusting for some exceptional items). Nevertheless, adjusted earnings did grow more than 12% for the period, and the company posted year-on-year free cash flow growth once again (continuing a six-year streak). (For more, see Profitability Ratios: Introduction.)

The Road Ahead
It is still early in the reporting cycle, but Stryker's commentary on the orthopedic market was definitely more positive than that of Biomet and another large rival that recently reported earnings. With new products in the hip category, it looks like Stryker is a share-taker in the market once again, though pricing is still an issue. As an aside, though, investors who want really exciting growth in orthopedics shouldn't be looking at Stryker, Smith & Nephew (NYSE:SNN) or Zimmer (NYSE:ZMH); look instead at much smaller companies like Orthofix (Nasdaq:OFIX), Alphatec (Nasdaq:ATEC) and Nuvasive (Nasdaq:NUVA).

Stryker's diversification efforts also seem likely to be a key factor in the company's future growth and investor expectations. The company completed its acquisition of Boston Scientific's (NYSE:BSX) neurovascular business (a business known to industry vets as Target Therapeutics), and there could be more potential here than many realize. True, Target had been losing share under BSX's management, but the FDA approval of a new coil and the InZone detachment system could reverse those share losses and help the company regain business from Covidien (NYSE:COV) and Terumo, among others. Moreover, there are a lot of other areas with Target that could benefit from some TLC and a little more R&D, so while Target is not going to have a major impact on Stryker today or tomorrow, it could add an incremental point or two of growth down the line.

Beyond that, though, there is no particular reason to believe that Stryker is done. The company could look at doing a deal within ortho to strengthen an area of weakness or add a new product category like BioMimetic's (Nasdaq:BMTI) orthobiologics. Just as likely, though, is the prospect that Stryker will use its sizable cash hoard and debt capacity to make another major market-entry deal (that is, buying into a market segment that it does not currently address). In time, and with the right series of deals, that could elevate Stryker into that next tier of diversified med-tech giants. (For further reading, check out A Checklist For Successful Medical Technology Investment.)

The Bottom Line
Even on an as-is basis that assumes no real future improvements in profitability or cash flow efficiency, Stryker still looks like a relative bargain. Factor in reasonable probability of high single-digit revenue growth and improving cash flow yield, though, and the stock becomes even more compelling. Although a lot of quality health care names have rebounded lately, Stryker included, long-term investors can still find a lot of value here. (For more, see The Value Investor's Handbook.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center