Despite Poor Economics, 2013 Is Looking Good At Stryker

| About: Stryker Corporation (SYK)

Stryker Corporation (NYSE:SYK) is a leading medical technology company that operates in three segments: Reconstructive, MedSurg, and Neurotechnology and Spine. Stryker remains committed to delivering incremental returns to investors by leveraging its solid balance sheet, healthy free cash flow and earnings power. While Stryker has struggled with international sales, the company is poised for growth in 2013 and beyond due to acquisitions and several new product launches.

Stryker Corp.'s third-quarter earnings rose 8% on modest revenue growth and stronger margins though negative currency impacts and soft international markets weighed on the medical-device maker's results. Stryker reported a profit of $353 million, or $0.92 per share, up from $327 million, or $0.84 per share, a year earlier. Revenue increased 1% to $2.1 billion, but without currency fluctuations and acquisitions, revenue was up 2.5%. U.S. sales grew 4.7%, compared with a 5.6% decline internationally.

Stryker and other orthopedics companies have suffered from a weak economy that has led patients to put off elective surgeries, such as knee replacements. Some analysts, though, have pointed recently to signs of a strengthening domestic market for joint-reconstruction products.

Stryker's flagship joint reconstruction business declined by 1%, as international sales in hips and knees declined by 9.6% and 4.3%, respectively. The U.S. market was better, with the overall unit growing by a total of 5.3% in the quarter.

The company's medical and surgical equipment division, known as MedSurg, rose 1.7% to$781 million, and was hurt by $8 million in lost revenue due to the recall of the company's Neptune Rover Waste Management System. The recall will cost the company $16 million in revenue in the fourth quarter.

Growth through Acquisitions and New Products

Stryker keeps on expanding its product portfolio by acquiring complementary businesses leveraging a solid balance sheet. The company completed four acquisitions in 2011 and is focusing on integrating those buyouts.

The acquisition of privately held medical products maker Gaymar Industries has offered a leeway to broaden Stryker s acute-care product offerings. Moreover, Stryker's acquisition of Orthovita has strengthened its competitive position across the spine, orthopedics and biosurgery markets.

Also, the acquisition of Memometal Technologies has boosted the company s exposure in the extremities market and has reinforced its position as a major player in the fast-growing foot and hand segments of this market.

Further, Stryker's acquisition of Concentric Medical has provided it an access to the fast-growing acute ischemic stroke market across the U.S., Europe and Japan. The addition of Concentric's offerings has enabled it to offer complete interventional stroke care for patients globally. Stryker won 510(k) approval for the stent retriever offering from Concentric in the month of August, 2012.

Moreover, the $1.5 billion acquisition of Boston Scientific's neurovascular unit has provided the company with an opportunity to diversify into fast-growing therapy markets. The acquisition provided Stryker with the next-generation Target detachable coils for occluding blood flow in vascular abnormalities. Recently in November, the neurovascular division acquired Surpass Medical to expand its Complete Stroke Care portfolio. Surpass mainstay, the CE-Marked NeuroEndoGraft family of flow diverters is an attractive addition to the company's product line.

Stryker keeps introducing new products in the market at regular intervals. Following the launch of the Restoration ADM, Rejuvenate and the X3 (Modular Dual Mobility) mobile bearing hip systems, the company recently unveiled the next-generation Accolade Primary Hip Stem (Accolade II). This system is a notch above the company's leading Accolade cement-less stem and is already on track to boost the Reconstructive business.

The ongoing transition from metal-on-metal (MOM) hip implants to next-generation hip systems represents a tailwind for the company. Given its less MoM exposure, Stryker is well placed to gain share in the hip market.

Although Stryker s knee franchise is still struggling, the recently approved OtisMed pre-op surgical cutting guides are expected to rekindle growth in this business. The Instrument business is benefiting from solid sales of the System 7 Power Tool that the company launched in late 2011.

Further, the Endoscopy division recently launched the 1488 High-Definition Camera with greater picture clarity, which is expected to benefit surgeons during minimally invasive procedures. The recently introduced small Target nano Detachable Coil and the Trevo stent retriever are considered to be the latest growth drivers for the Neurovascular segment.

Stryker remains committed to delivering incremental returns to investors by returning its healthy free cash flow and earnings to benefit shareholders.

Stryker recently approved a 25% increase in its quarterly dividend to $0.265 per share. The company has a current dividend yield of 1.9%. Stryker has a 5-year average dividend growth rate of 26.3%.

Stryker also announced that its board authorized the company to repurchase an additional $405 million of its common stock, which raises the total share repurchase authorization to $1 billion. Stryker has a current market cap of $21.7 billion making the total repurchase of common stock 4.61% of total market cap.

Trading at a current PE of 15.3, Stryker is undervalued to peers with an average PE of 18.8. While Stryker has announced full-year 2012 EPS guidance of $4.05, the acquisitions and new products will increase EPS to $4.30 in 2013 and 4.70 in 2014. Based on the industry average PE, Stryker Corporation as a 12-month price target of $80.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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