Stryker: Just What the Doctor Ordered

In dicey markets like the present one, you often get chances to buy the very best companies for historically incredible valuations. Stryker (SYK) has an outstanding track record of growth in both sales and earnings. In fact, the latest Value Line data [November 28 issue] shows record revenues, cash flow, book value and EPS in each year since at least 1992.

Even better, the balance sheet showed cash assets of over $2.2 billion versus total debt of just $21.2 million as of September 30 this year. The credit crisis will pose no problems for this wonderful growth company.

Stryker manufactures and markets orthopedic implants and medical/surgical equipment, letting it avoid the problems caused by the recessionary environment. When you need a new hip, knee or facial implant, you don't put it off like you would an optional vacation or shopping spree.

Here are the last 8 years of per share data [as reported by Value Line]:

Year….Sales……CF..…..EPS…..Div.….Book Val….Avg. P/E

2000 …5.84 ….. 0.84…. 0.55 …. 0.04 ….. 2.18 ……… 37.1x

2001 …6.61 ….. 1.13 … 0.67 …. 0.04 ….. 2.68 ……… 40.3x

2002 …7.60 ….. 1.37 … 0.88 …. 0.05 ….. 3.78 ……… 33.0x

2003 …9.08 ….. 1.71 … 1.12 …. 0.06 ….. 5.40 ……… 32.4x

2004 ..10.59 ….. 2.08 … 1.43 …. 0.07 ….. 6.84 ……… 33.0x

2005 ..12.02 ….. 2.49 … 1.75 …. 0.09 ….. 8.03 ……… 27.7x

2006 .. 13.25 …. 2.85 … 2.02 …. 0.11 ….. 10.27 ….…. 23.6x

2007 .. 14.60 …. 3.33 … 2.40 …. 0.22 ….. 13.09 …….. 27.9x

2008 .. 17.10 …. 3.95 … 2.88 …. 0.33 ….. 14.70 …….. 19.5x

2009 consensus estimate for EPS is now running at $3.35, making the forward P/E a remarkably low 11.15x versus SYK's 10-year median P/E of 32.

These shares traded at much higher multiples even during past bear markets.

At the low in 1998, SYK was still 20.6x that year's EPS. At the 2001 nadir it was 32.4x, and right at the low in the fall of 2002 it commanded 24.9x trailing earnings.

A return to even 20 times 2009 expectations leads to a target price of $67 or up $29.66 [ + 79.4% ] from today's close. Is that reasonable? SYK traded at $76.90 last year and as high as $74.90 in 2008.

Except for the past couple of weeks, Stryker shares are now below their lows since the first half of 2003 when EPS were less than half today's level.

Value Line gives this company an 'A' for financial strength, an above average safety rating, and a top 1 percent ranking for earnings predictability.

They note that SYK shares have outperformed 85% of all stocks in the 1700 company Value Line database over the past decade.

Disclosure: Author bought SYK shares Tuesday.

Comments

[Dan Jacome:]

long a takeover target, maybe something happens if valuations stay this low...

2008 Nov 26 10:23 AM

[123:]

Do you understand what is the difference between Stryker and Zimmer Holdings? They seem very similar, haven't been able to figure it out. Thanks.

2008 Nov 26 10:57 AM

[SwingTimer:]

Welcome back Paul. But what's your option strategy on this one.

2008 Nov 26 01:44 PM

[cyclingscholar:]

Is the low price because investors are spooked about health care reform, much like in the early Clinton years? Are other low debt/no debt device manufacturers, such as Intuitive Surgical, similarly attractive at current prices?

cyclingscholar

2008 Nov 27 10:29 AM

[Dan Jacome:]

uncertainty has to do likely with any possible reimbursement changes for med tech under the new president. We think Health IT is "less uncertain" than med devices, insurers, or hospital plays...Med devices are big ticket items, ad in a ad economy, people actually DO put off elective procedures and hospitals cut back on what new eqpt they buy, so that, too, is probably pressuring stocks. But long term, they seem ok. People will get older and people will keep getting knee/hip replacements!

2008 Nov 28 11:40 AM

[Paul Price:]

Stryker announced a dividend INCREASE from $0.33 to $0.40 on their qaurterly payout based on a record date of December 31, 2008 payable January 30, 2009.

2008 Dec 04 09:01 AM

[Paul Price:]

Correction: The dividend increase was correct but this is an ANNUAL not a quarterly payout.

2008 Dec 04 10:50 AM

[Paul Price:]

AP
Stryker gives solid 4Q and 2009 sales outlook
Friday January 9, 11:55 am ET

Stryker rises after 2008 revenue forecast tops expectations; 2009 outlook meets estimates


KALAMAZOO, Mich. (AP) -- Medical device maker Stryker Corp. on Friday reported stronger fourth-quarter sales than Wall Street expected, and gave an optimistic view of 2009.
Stryker posted strong sales for the fourth quarter and the full year, with growth for both its orthopedic implants and MedSurg Equipment unit. For 2009, the company forecast profit and sales that were generally in line with analyst estimates.

Stryker stock picked up $2.37, or 6.1 percent, to $40.95 in morning trading.

The company said its revenue grew 4 percent in the fourth quarter, to $1.72 billion, as stronger sales in the U.S. outweighed a decline in overseas revenue. Orthopedic implant sales rose 4 percent for the quarter, to $1.02 billion, and MedSurg revenue grew 3 percent to $701 million.

Analysts expected $1.7 billion in revenue, according to a survey by Thomson Reuters.

The company is scheduled to make a full report of its fourth-quarter and full-year results Jan. 27.

For the full year, Stryker maintained its profit forecast of $2.82 to $2.84 per share, excluding restructuring costs. It said revenue grew 12 percent to $6.72 billion, with U.S. sales rising 11 percent to $4.28 billion and international sales up 13 percent to $2.44 billion. Both units posted strong growth: orthopedic implant revenue increased 11 percent to $3.97 billion, and revenue from MedSurg rose 14 percent to $2.75 billion.

Analysts expect a profit of $2.83 per share on $6.68 billion in revenue.

Including the restructuring costs, Stryker's forecast came to $2.77 to $2.79 per share.

In 2009, Stryker said it anticipates $3.12 to $3.22 per share in profit. It forecast sales would rise 6 percent to 9 percent in constant currency, but recent strength in the dollar would reduce revenue by 3 to 4 percent. That implies total revenue of $6.85 billion to $7.12 billion.

Analysts forecast $3.15 per share and $7.03 billion in sales.

Jan 09 12:21 PM