Stryker Slows But Doesn't Stumble

9/21/2009


  Recent Price
$48
  Dividend
$0.40
  Yield

0.8%

  P/E Ratio
17
  Shares (millions)
399
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$65.40 - $30.82

Stryker’s ($48; SYK) current valuation represents an attractive entry point for a company with leading positions in artificial joints and hospital equipment — markets with solid long-term growth potential. At 17 times trailing earnings, Stryker trades 32% below its five-year average P/E ratio. The stock also looks cheap relative to trailing sales, cash flow, and book value. Stryker is a Buy and Long-Term Buy.

As the third-biggest provider of knee and hip replacements, Stryker controls about 20% of the global market. The company also holds an estimated 32% share of the global market for operating-room equipment.

Orthopedic implants accounted for 61% of Stryker’s sales in the first half of 2009, with the balance from medical and surgical equipment. In the six months ended June, implant sales were flat, though they rose 6% in constant currency. With hospitals clamping down on spending, Stryker’s equipment revenue declined 8%, or 4% in constant currency.

The stock, with a Quadrix® Performance score of 34, has lagged the market this year. Like many other companies, Stryker beat Wall Street expectations for profits in the June quarter but missed on revenue. That revenue weakness reflects maladies shared by many health-care suppliers: Hospitals have cut capital spending, and fewer patients are pursuing elective — and even not-so-elective — procedures. Hospital-spending trends aren’t the only issues ailing this stock.

The symptoms

Regulatory woes: Stryker has received a total of four warning letters from the FDA. But management says it is addressing the problems and hopes to return to compliance by 2010.

Guidance revision: In July, Stryker cut its 2009 sales-growth target to between 1% and 3% at constant currency, reflecting recession-related weakness in both the medical and orthopedics businesses. However, management expects per-share-earnings growth of 2% to 10%.

Uncertainty over health-care reform: Some fear that among medical devices, pricey orthopedics could prove most vulnerable to health-care reform. Management calls the fears “overblown.” The company also noted that pricing in the U.S. joint-replacement market has been trending slightly lower for five years.

Adverse clinical data: Researchers for two studies found that vertebroplasty, a low-risk way to repair fractured spinal bones, was as effective as no treatment at all. Stryker produces bone cement used in these procedures. However, bone cement represents only a small portion of Stryker’s revenue, and some doctors have questioned the study results, citing limited patient participation.

The diagnosis

Despite a battery of industry and company-specific challenges, Stryker’s outlook remains bright. The consensus projects per-share-profit growth of 6% this year and 11% next year. Sales of implants continue to rise in constant currency, and hospitals can only keep their wallets closed for so long.

Assuming the 2010 consensus profit estimate of $3.27 per share is correct, a return to the five-year average P/E would put Stryker shares at $82 by early 2011. While that target seems aggressive, a move to $60 is certainly possible. An annual report for Stryker Corp. is available at 2825 Airview Blvd., Kalamazoo, MI 49002; (269) 385-2600; www.stryker.com.

STRYKER
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $0.73 vs. $0.73 - 5% $41.73 -

$32.34

15 - 12
Mar '09 0.71 vs. 0.70 - 2% 44.47 - 30.82 16 - 11
Dec '08 0.69 vs. 0.66 + 4% 63.26 - 35.38 23 - 13
Sep '08 0.66 vs.

0.55

+ 14% 69.00 - 60.50 26 - 23
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $6.72 $2.78 $0.33 $74.94
-
$35.38 27 - 13
2007 $6.00 $2.40 $0.22 76.89
-
54.89 32 - 23
2006 $5.41 $2.02 $0.11 55.92
-
39.77 28 - 20
2005 $4.87 $1.75 $0.09 56.32
-
39.74 32 - 23
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
91 62 79 94 98 44 34

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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