Orthopedic implant and medical and surgical equipment provider Stryker (NYSE:SYK) closed out its year by reporting improving sales and profit growth. Its operations were unexpectedly hit during the recession but are recovering nicely and have great long-term appeal. Moreover, buyout speculation in this space means multiple avenues for high shareholder returns.
IN PICTURES: World's Greatest Investors

Fourth Quarter Recap
Net sales improved 8.6% to $2 billion. Stryker operates two primary divisions. The largest is orthopedic implant sales, and it accounted for 58.5% of the total quarterly top line and reported modest 4.5% sales growth. The other division sells equipment for medical and surgical uses and experienced robust 15.3% to account for the rest of sales. Geographically, sales rose 11% domestically to account for over 64% of the total top line while international accounted for the rest and improved 5 percent.

Product cost growth lagged the sales increase and boosted gross margins by 10.5% to $1.4 billion. R&D costs and SG&A expenses rose much faster than sales, though, and the quarter included an intangibles expense and impairment charge. This pushed operating income down nearly 25% to $386.4 million. Lower income taxes helped minimize the decrease in the bottom line as net income fell only 3.6% to $295 million, or $0.74 per diluted share.

Year End Review and Outlook
Full year sales grew 8.9% to $7.3 billion, gross profit rose 10.9%, and operating income increased 9.8% to $1.8 billion. Net income improved 15% to $1.3 billion, or $3.19 per diluted share. Free cash flow came in at approximately $4.25 per diluted share.

For the coming year, management expects to report sales growth between 11% and 13% and earnings between $3.65 and $3.73 per diluted share. This would represent year-over-year profit growth between 10% and 12 percent.

Bottom Line
Stryker continues to see a rebound in organic growth trends. The recession surprisingly hit knee, hip and other joint replacement surgeries in what used to be seen as a business that was recession-proof. It is also supplementing internal growth with acquisitions and earlier in January closed on the acquisition of Boston Scientific's (NYSE:BSX) neurovascular business that sells "products used for the minimally invasive treatment of hemorrhagic and ischemic stroke."

At a forward P/E of just over 15, shares of Stryker are reasonably valued given it has a track record of growing sales and earnings in the double digits. The trailing free cash flow multiple is even more reasonable at about 13.5. Upside exists as sales recover along with the economy and there is also the potential for a buyout. Recently, Johnson & Johnson (NYSE:JNJ) was rumored to be interested in acquiring smaller British-based rival Smith & Nephew plc (NYSE:SNN). J&J or Medtronic (NYSE:MDT) could end up being interested in Stryker and have the financial muscle to carry out such an acquisition. But if not, company growth trends remain appealingly robust on their own. (To learn more, see Investing In The Healthcare Sector.)

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

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center