Stryker Keeps Fit During Tough Times

2/9/2009


  Recent Price
$42
  Dividend
$0.40
  Yield

1.0%

  P/E Ratio
15
  Shares (millions)
403
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$70.56 - $35.38

Stryker’s ($42; SYK) streak of 31 straight quarters of double-digit revenue growth ended in the December quarter. But the manner in which the streak ended attests to the company’s quality — quarterly sales still rose 8% excluding currency translation and topped consensus estimates.

Founded in 1941, Stryker has leading market positions in artificial joints — such as prosthetic hips and knees — and hospital equipment. Stryker, a defensive company in a defensive industry, has $2.20 billion in cash, or $5.32 per share, and no long-term debt. Stryker is being upgraded to a Buy and a Long-Term Buy.

Business breakdown
The orthopedic-implants business — artificial joints and trauma products — accounted for 59% of sales in 2008. Annual revenue climbed 9% at constant currency on growth from knee implants (up 15%), spinal implants (up 17%), and trauma products (up 12%). Medical and surgical equipment, such as medical drills, video cameras, and specialty stretchers, account for the remaining sales. Equipment revenue rose 6% at constant currency in 2008.

Stryker generates 36% of sales overseas, making it susceptible to currency fluctuations. A strong dollar reduced overall sales growth by 4% in the December quarter and could provide a similar drag this year if exchange rates hold.

Operating cash flow advanced 14% in 2008, while free cash flow rose 18%. Stryker used some of that cash to boost its annual dividend, payable in January, for a 15th straight year. A strong balance sheet gives Stryker the flexibility to spend heavily on research and consider acquisitions, though management says it will avoid burdening the company with heavy debt obligations.

Wall Street has hammered shares of Stryker rivals that reported weak earnings and gloomy guidance. Stryker has a sunnier outlook, forecasting per-share earnings will grow 10% to 14% in 2009, stronger than the consensus projection of 10% growth. The company says it believes cost controls and product launches can support long-term growth of 15%. In the current environment, both targets look challenging, though not out of reach for such a consistent grower.

While the medical-device business tends to be relatively recession-resistant, Stryker’s sales, particularly in the medical and surgical segment, could suffer during the downturn. Hospitals are cutting spending on new equipment, and patients are postponing elective treatments. The American Hospital Association found that half of hospitals surveyed in December halted capital projects, citing economic uncertainty and difficult financing.

Conclusion
Even if Stryker’s guidance proves somewhat optimistic, the stock still appears cheap. Shares trade at 14 times the lowest 2009 estimate, well below the five-year average forward price/earnings ratio of 34.

While a return to the five-year average valuation seems unlikely in the next year or so, a combination of modest P/E multiple expansion and double-digit profit growth should drive market-beating returns over the next two years. So far this year, the stock has risen 5%, while the S&P 500 Index is down 7%. An annual report is available at 2825 Airview Blvd., Portage, MI 49002; (269) 385-2600; www.stryker.com.


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