Tickers in this Article: SYK, SNN, JNJ, BSX, MDT
Medical device firm Stryker (NYSE:SYK) reported double-digit sales and adjusted earnings growth during its first quarter. If growth levels stay in the double digits, this company may have appeal for investors. In addition, merger and acquisition activity in the industry will be important to illustrate the long-term growth appeal of the medical device space for investors and strategic acquirers alike. Here we delve into the company's first-quarter results, and its prospects going forward. TUTORIAL: Mergers And Acquisitions 101

First-Quarter Recap
In the first quarter of 2011, reported sales rose a very healthy 12% to $2 billion and improved a still-respectable 10.2% when stripping out positive currency fluctuations. Reconstructive sales of Stryker's flagship knee, hip and related joint products grew 1.9% to $911.1 million, while the MedSurg unit, which sells medical surgical equipment, posted 13.1% growth for total sales of $763.9 million. The third unit is neurotechnology and spine, which saw sales jump 48.3% to $340.3 million. Organic sales were 4% on a constant currency basis, while total divisional sales were boosted by the acquisition of Boston Scientific's (NYSE:BSX) neurovascular business. By geography, domestic sales grew 9% to $1.3 billion and international sales jumped 17.6% to $736.1 million.

Cost of sales growth was above that of total sales, as were selling, general, and administrative operating costs. R&D costs also jumped, rising 23.2% to $110.9 million. Much of the rise was due to the neurovascular acquisition, which resulted in higher inventory costs and acquisition-related charges. As a result, operating income fell 5.1% to $423.5 million. Lower income taxes helped temper the net income decline to 4.4%, as earnings fell to $307.4 million.

Share buybacks meant earnings per share fell only 2.5% to 78 cents per diluted share. Stripping out acquisition costs, the company estimated earnings of 90 cents per diluted share, or 12.5% ahead of last year's first quarter. This came in above analyst projections. Free cash flow came in at about half of reported earnings at just under $150 million, or about 38 cents per diluted share. (To learn more, see A Breakdown Of Stock Buybacks.)

Stryker's Outlook
For the full year, management expects sales growth between 11% and 13%, which includes acquisitions. Organic growth is targeted between 5% and 7%. Stryker projects recurring earnings growth between 10% and 12%, or in a range of $3.65 and $3.73.

Profit and cash flow levels were adversely affected by Stryker's acquisition of Boston Scientific last year, but should rebound quickly. Eventually, orthopedic sales will recover too.

The Bottom Line
Stryker's forward P/E, if the company hits the high end of its guidance, is somewhat rich at 15.6, but the valuation will be justified if growth levels return back to the double digits. Over the past three years, average annual sales and earnings have grown only in the high single digits. Overall, Stryker's medical device exposure has great appeal and is evidenced by merger activity in the industry.

Recently, it was confirmed that healthcare giant Johnson & Johnson (NYSE:JNJ) was talking with Swiss medical device firm Synthes about a potential $20 billion buyout; the company was thought to be interested in European rival Smith & Nephew (NYSE:SNN). With a market capitalization of less than $23 billion, there is the potential that Stryker could be digested by J&J, or even medical device giant Medtronic (NYSE:MDT).

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

comments powered by Disqus

Trading Center