Stryker Corp Looks Good for Health Care Rebound

The medical equipment and supplies sub-sector of health care has come under significant pressure in the last 9 months or so. Big names such as Stryker Corp. (SYK), Zimmer Holdings Inc. (ZMH), and Medtronic Inc. (MDT) are trading at levels we have not seen in years. The whole aura of health care being “recession resistant” or “recession proof” is now thrown away and is an old folktale. Although these economic times are pretty much unprecedented, one thing is for certain: there has really been no safe place to hide in health care, except maybe to the likes of generic drug manufacturers such as Teva Pharmaceutical Industries (TEVA) or Mylan Inc. (MYL).

The depressed Medical Equipment and Supplies industry has faced many headwinds recently. The recession has directly caused a general slowdown in elective procedures coupled with ongoing reductions in hospital capital expenditures. The Department of Justice in the last year has brought many lawsuits to the companies mentioned above and the FDA has increased inspections of manufacturing facilities because of safety concerns. Similarly, another headwind they face is the increasing value of the dollar. The bottom lines of these companies have been adversely affected since a large portion of the industry derives revenues outside of the United States.

When the market does rebound, you should position your portfolio properly to capture the upside, but you must be proactive in doing so. I feel that Stryker Corp. is the best holding within this space to capture this aforementioned upside. In order for a company to be well positioned for an economic recovery and even to weather the current market turbulence, it must have a strong balance sheet since “cash is king” in the current credit environments. Stryker is known year after year for having one of the better balance sheets in the industry. Currently, its total cash and marketable securities stand at $2.2 billion with no total debt . In addition, let’s not forget to mention that free cash flow was up 51% from $160.0 million to $242.0 million in the most recent quarter.

Stryker, once known for consistent double digit growth, operates in two segments: Orthopaedic Implants and MedSurg Equipment. The Orthopaedic Implants segment represented 61% of sales in the last quarter while the MedSurg Equipment segment totaled 39% of total sales. Within the Ortho Segment, Stryker is well known for its well constructed hip, knee, and spine business. These segments have caused headaches for the long-term Stryker investor last year due to the elective nature of these procedures. On the flip side of the business, 60% of sales within the MedSurg segment come from capital equipment, which obviously is seeing a slowdown from decreasing hospital expenditures.

These two issues are ripe for the picking once we see a recovery, since hospitals will start to increase capital spending once admissions pick up. When we see a stabilization or a slight decrease in unemployment, the consumer will be able to get enough insurance coverage to help pay for these elective procedures that they have put off. With a strong balance sheet, successful business model, and effective management, Stryker Corp. is where your money should be when the economy recovers.

The rest of this free research report “Stocks For An Economic Recovery” which includes commentary on all sectors is available for download at the following link.

Disclosure: The fund the author manages is long TEVA.

Comments

[Ryan Vanzo:]

I agree, and am long SYK. Good luck with your Nittany Lion Fund, how did it do this past year? It's a pretty cool thing managing real money, my college Bentley University runs a similar program.

Good Luck,
Ryan Vanzo

Jun 18 10:47 AM

[Mad Hedge F...:]

These stocks are discounting a new future. I met with Dr. Christina Romer, chairman of the Council of Economic Advisors, who practically tore my ear off proselytizing her new found religion, health care reform. Appointed by Obama to advise him on all things economic, Dr. Romer had this hot potato dropped in her lap six weeks ago in one of her daily briefings to the President. With the enthusiasm and ebullience of a new found convert, Dr. Romer laid out goals that were nothing less than revolutionary. She plans not to just “socialize” medicine, but to fundamentally rebuild the entire health care infrastructure of the US. Tax incentives will be created to encourage value over volume. People can keep existing plans they like. Technology will be applied to cut costs, not only to come up with more complicated and expensive cures. Existing subsidy programs for the poor will be folded into the new plan, offering coverage to 46 million uninsured. Providers will get cash incentives for prevention. Individuals will gain the advantages of risk pooling. Pre-existing conditions will be covered. All of this will be made revenue neutral through the taxation of employer paid insurance and savings through new efficiencies. If the administration can pull all of this off, the benefits will be huge. An annual 1.5% reduction in health care costs will add 8% to GPD and increase family incomes by $10,000/year by 2040. This will boost corporate profitability and competitiveness, labor mobility, the quality of life, and reduce the budget deficit and unemployment. Failure will see health care spending rocket from the current 18% to 33% of GDP in 30 years, and the number of uninsured explode to 76 million. Romer spewed out statistics as only an economics PhD from MIT can. Oh, and now or the stuff you care about. The economy will shrink in Q2, see no growth in Q3, and turn positive by Q4. The issue doesn’t affect me, as I have always avoided health care, insurance, pharmaceutical, and biotech stocks like the plague; they being subject to capricious government approvals, and therefore inherently unpredictable. These are the opening shots of a political dogfight that will ensue over the next three months and dominate the media.

Jun 18 01:09 PM

[khaz:]

Health care reform is a big headwind near term, no question. But as long as the docs pick the implants, these stocks will be good for the next 15 years. I don't see the docs rolling over and signing up for government jobs any time soon.

Long ZMH

Jun 19 03:47 PM

[Tim Hiteshew:]

I am long SYK as well, but we may not see earnings improve for another year or two as hospitals cut back on spending. SYK has excellent fundamentals and once the economic climate improves, so will its share price.

Jun 19 04:19 PM

[ArtfulDodger:]

Name one area of the economy that the government has delved into and saved either the industry or the taxpayers money.

What in the world makes anyone think the government can take over 20% of the economy and save us all money?

Jun 20 01:07 AM