Stryker’s Stock Is Out Of Joint[heh]With Company's Rosy Prospects
[I’ve posted on various occasions about the demographic tailwind for such orthopedic companies as SYK and ZMH, and the current valuations are compelling, IMO. Please see #msg-36360161 for a related story and #msg-36461079 for the SYK and ZMH 1-year charts.]
The thigh bone's connected to the hip bone, and the hip bone's connected to the backbone. The connections, however, wear out with age, which is bad news for baby boomers but big business for Stryker, a leading maker of hip, knee, spine and other joint replacements, and a likely beneficiary of a coming wave of surgeries in the U.S. and abroad.
The recession has knocked Stryker (ticker: SYK) out of joint, curbing its historic double-digit rate of sales and profit growth. Patients have delayed costly elective surgery, hurting the orthopedic-implant business, while hospitals have reined in spending on beds and stretchers, denting the company's Med Surg Equipment unit. As a result, investors have the opportunity to snap up shares for $40 apiece, nearly 50% below the stock's 2008 high of $75.
Stryker's business -- and its shares -- could rebound sharply in 2010, as the economy recovers and employment perks up. Analysts expect the Kalamazoo, Mich., company to earn $1.2 billion, or $2.96 a share, this year, up just 5% from last year's $2.83. But earnings could rise 12% next year, to $1.3 billion, or $3.31 a share, on sales of $7 billion.
Help could come from any increase in hospital spending, which is likely to be flat to up 5% in 2010, after falling more than 20% this year, according to some analysts. Also, foreign-currency exchange could turn from a headwind to a tailwind toward the end of '09 if the dollar stays weak. Overseas markets account for 35% of Stryker's sales, and the company is pushing to expand in Japan, Africa, the Middle East and other regions.
"As the economic situation stabilizes, a favorable exchange rate and increased health-care spending will be significant upside catalysts for Stryker's growth," says Ronnie Moas, president of Standpoint Research in New York. Moas thinks the stock could trade between 50 and 55 next year.
Founded in 1941 by Dr. Homer Stryker, an orthopedic surgeon, Stryker is the tenth-largest medical-device company in the U.S., and a prominent player in the $38 billion orthopedic-implant market, where it competes with Johnson & Johnson (JNJ), Zimmer Holdings (ZMH), Medtronic (MDT) and others.[SYK and ZMH have a much larger relative exposure to orthopedics than JNJ and MDT.]Last year the orthopedic-implants business contributed 59% of total sales of $6.7 billion, while the Med Surg unit chipped in 41%.
With $2.2 billion of cash and only $20 million of debt, Stryker has one of the strongest balance sheets in the health-care sector. It has generated return on equity of at least 19% for nine straight years, and produces more than $1 billion a year of cash flow. The company has used its cash to buy back stock and pay a dividend[#msg-33948513] -- now 40 cents a share, for a yield of 1%. It also has made small acquisitions and is rolling out new products, including a titanium hip cup and a wireless HDTV operating-room monitor.
Worries that health-care reform will crimp profits are obscuring Stryker's long-term prospects, as are concerns the slowdown in domestic hospital spending could go global. "An [international] capital-equipment slowdown may be the next leg down for Stryker," says Needham analyst Ed Shenkan, who has a Hold rating on the shares.
Moreover, the company has received four "warning letters" from the Food and Drug Administration in the past two years that led in some cases to voluntary product recalls. The letters, the latest received in May, alleged, among other things, improper quality and compliance issues at company facilities, including the sale of products without marketing approval. Stryker also is fending off regulatory investigations into its promotion of a bone-growth protein, and the sale of medical devices overseas.
The company is in the early stages of a three-year plan to spend $200 million to upgrade its quality controls and compliance system. At an analyst meeting in May, Chief Executive Stephen MacMillan, a J&J veteran, said management is making "tremendous progress" in improving quality, but conceded "regulatory overhang in the next 12 months" is the biggest risk facing the company. Stryker officials weren't available to comment.
Stryker's stock could fall to 35 or so in coming quarters if the market loses steam. But investors' concerns largely are baked into the price. Morningstar analyst Julie Stralow says a $40 stock assumes that sales increase only 4%, compounded, through 2013, and that operating margins fall to 18% from 23% now. "The current share price reflects a dire scenario" that is unlikely, says Stralow, who pegs fair value at $72 a share.
Stryker sells for 12 times 2010 estimates, slightly above peers. Back out its $5-plus per share in net cash, and the price/earnings ratio falls to 10. For a company with Stryker's healthy prospects, it doesn't get more out of joint than that.‹
[SYK has two business units: orthopedic implants (~60% of sales) and hospital surgical equipment (~40% of sales). The former grew year-over-year, but the latter declined as hospitals deferred some expenditures on capital equipment. In the two units combined, SYK’s sales are about 40% ex-US, and this caused a top-line hit as the Dollar was stronger relative to other currencies (mainly the Euro) in 2Q09 than in 2Q08; this currency effect is likely to narrow or reverse in the second half of the year, however.
I consider SYK a solid long-term holding. The demographic tailwind for orthopedic implants is brisk, which assures robust growth in this business unit unless the company does something to screw it up. Sales in the hospital-equipment unit should resume growth in due course because equipment wears out and hospital can’t put off their replacement purchases indefinitely. The article in #msg-38901835 is a decent overview of the company’s prospects, and #msg-38952075 is also on-point.
Note: This PR was issued in July. I omitted the financial tables.]
›KALAMAZOO, Mich., July 21 /PRNewswire-FirstCall/ -- Stryker Corporation (NYSE: SYK ) reported operating results for the quarter ended June 30, 2009 as follows:
Second Quarter Highlights
* Net sales of $1,634 million were flat (0.1% decrease) on a constant currency basis (4.6% decrease as reported)
* Orthopaedic Implants sales increased 5.1% on a constant currency basis (0.2% decrease as reported)
* MedSurg Equipment sales decreased 7.7% on a constant currency basis (11.0% decrease as reported)
* Net earnings decreased 4.7% from $306 million to $291 million
* Diluted net earnings per share were unchanged at $0.73
"In a challenging environment, we were very pleased with the growth of our U.S. Orthopaedic Implant businesses, which accelerated from last quarter and showed strong year-over-year gains. This performance, combined with our heavy focus on controlling costs across the company preserved our diluted earnings per share results in the face of the steep short term slowdown in our MedSurg businesses, and the foreign currency headwinds in the quarter," commented Stephen P. MacMillan, President and Chief Executive Officer.
Net sales were $1,634 million for the second quarter of 2009, representing a 4.6% decrease compared to net sales of $1,713 million for the second quarter of 2008, and were $3,236 million for the first half of 2009, representing a 3.3% decrease compared to net sales of $3,347 million for the first half of 2008. On a constant currency basis, net sales decreased 0.1% for the second quarter and increased 1.6% for the first half.
Net earnings for the second quarter of 2009 were $291 million, representing a 4.7% decrease compared to net earnings of $306 million for the second quarter of 2008. Diluted net earnings per share for the second quarter of 2009 were unchanged at $0.73 compared to the second quarter of 2008. Net earnings for the first half of 2009 were $572 million, representing a 4.0% decrease compared to net earnings of $596 million for the first half of 2008. Diluted net earnings per share for the first half of 2009 increased 0.7% to $1.44 compared to $1.43 for the first half of 2008.
Sales Analysis
Domestic sales were $1,047 million for the second quarter of 2009, representing a decrease of 0.5%, as a 9.1% increase in shipments of Orthopaedic Implants was offset by an 11.0% decrease in shipments of MedSurg Equipment. Domestic sales were $2,089 million for the first half of 2009, representing an increase of 0.2%, as a result of a 7.5% increase in shipments of Orthopaedic Implants offset by an 8.0% decrease in shipments of MedSurg Equipment.
International sales were $587 million for the second quarter of 2009, representing a decrease of 11.0%. The impact of foreign currency comparisons to the dollar value of international sales was unfavorable by $77 million in the second quarter of 2009. On a constant currency basis, international sales increased 0.6% in the second quarter of 2009, as a result of a 0.4% increase in shipments of Orthopaedic Implants and a 1.1% increase in shipments of MedSurg Equipment. International sales were $1,146 million for the first half of 2009, representing a decrease of 9.1%. The impact of foreign currency comparisons to the dollar value of international sales was unfavorable by $164 million in the first half of 2009. On a constant currency basis, international sales increased 3.9% in the first half of 2009, as a result of a 3.3% increase in shipments of Orthopaedic Implants and a 5.2% increase in shipments of MedSurg Equipment.
Worldwide sales of Orthopaedic Implants were $1,014 million for the second quarter of 2009, representing a decrease of 0.2%, and were $1,987 million for both the first half of 2009 and 2008. On a constant currency basis, sales of Orthopaedic Implants increased 5.1% in the second quarter and 5.7% in the first half of 2009, based on higher shipments of reconstructive, trauma, spinal and craniomaxillofacial implant systems.
Worldwide sales of MedSurg Equipment were $620 million for the second quarter of 2009, representing a decrease of 11.0% as reported and 7.7% on a constant currency basis based on lower shipments of surgical equipment and surgical navigation systems; endoscopic, communications and digital imaging systems; and patient handling and emergency medical equipment. Worldwide sales of MedSurg Equipment were $1,248 million for the first half of 2009, representing a decrease of 8.2% as reported and 4.4% on a constant currency basis as higher shipments of surgical equipment and surgical navigation systems were offset by lower sales of endoscopic, communications and digital imaging systems and patient handling and emergency medical equipment.
Outlook for 2009
The Company projects that diluted net earnings per share for 2009 will be in the range of $2.90 to $3.10, an increase of 2% to 10% over adjusted diluted net earnings per share of $2.83 in 2008. The financial forecast for 2009 anticipates a constant currency net sales increase in the range of 1% to 3%. If foreign currency exchange rates hold near June 30, 2009 levels, the Company anticipates an unfavorable impact on net sales of approximately 1.5% to 2.5% in the third quarter of 2009 and an unfavorable impact on net sales of approximately 2% to 3% for the full year of 2009.
Conference Call
As previously announced, the Company will conduct a conference call for financial analysts at 4:30 p.m., Eastern Time, today. To participate in the conference call dial 866-700-0133 (domestic) or 617-213-8831 (international) and enter the participant passcode 77115009. A simultaneous webcast of the call will be accessible via the Company's website at www.stryker.com. The call will be archived on this site for 90 days.‹
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