Tuesday, April 29, 2008

Stryker Corp: A Hip Stock for An Uncertain Market

Stryker Corp (SYK-$64.50) has been a leading international medical technology company for over 60 years, with a diversified product line focused on orthopedics and a presence in other medical specialties, including pain management, and emergency medical equipment.

In the most recent quarter, Stryker’s 1Q sales increased 14.7% to $1.63 billion, largely inline with street estimates. Favorable exchange contributed 4.4% points to growth. Excluding the FX benefit, sales were up 10.3% as MedSurg sales growth of 14.9% was offset by Orthopedic Implant sales growth of 7.3%.

Deloitte estimates that the spending power of Americans aged 50+ is $1.7 trillion. One of the main expenditures of aging consumers is health care. And, as all of the men and women who took up jogging in their teens get older, they are putting a lot of stress on their joints. That creates a lot of business for orthopedic surgeons. Stryker (SYK) is a direct beneficiary of this trend.

SYK has risen 25% annually on average over the past 10 years, which is quite impressive. Its steady performance has made it an institutional favorite especially in periods when the market has been relatively soft.

Gross margin came in 20 bps higher to 69.4% YoY although SYK expects to incur higher compliance and quality expenses, as well as higher raw material cost (e.g. steel and cobalt chromium) for the rest of the year and therefore expects 08 FY gross margins to be around the same level as that of 07.

While the recall of Trident by SYK recently may have hampered its growth, to offset the weakness SYK has other options such as ramping up training on the Cormet hip resurfacing implant more aggressively and SYK might attempt to accelerate the launch of its Triathlon revision knee system. With regards to Cormet, so far the street expects it to become a more meaningful growth driver over the course of 2008.

SYK is likely to continue through at least 09 (track record of navigating through even the toughest of times). Investors can expect that SYK to deploy its $2B+ cash balance to acquire higher- growth and/or higher- margin entities, in order to achieve historical growth targets.

A catalyst for an upswing in share price could be the company’s analyst meeting on May 8, when the medical device maker reviews its product pipeline portfolio and its strategic outlook. Management should also provide an update on the status of the FDA warning letters and possibly comment on monthly trends within Orthopedics and Medsurg.

Contributor Yaser Anwar does not hold a financial position in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure policy.

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