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Medical technology giant Stryker Corp. (SYK) posted better-than-expected third quarter results with earnings of 80 cents per share exceeding the Zacks Consensus Estimate of 77 cents while net income rocketed 47.5% year-over-year led by sustained healthy sales from the MedSurg Equipment division.

Revenues grew 6.9% year-over-year to $1,768 million, also beating the Zacks Consensus Estimate of $1,749 million. Stryker’s MedSurg business continues to show resilience in a still challenging macroeconomic backdrop. However, strong growth at MedSurg was partly marred by a yet another sluggish performance by the core Orthopedic division due to weak spine and knees sales.

Stryker’s domestic sales benefited from higher shipments of orthopedic implants and surgical equipment while international revenue growth was muted on account of an unfavorable foreign exchange translation effect. Stryker raised the bottom-end of its sales and earnings guidance for fiscal 2010. The forecast-beating results coupled with the company’s guidance revision pushed up Stryker’s shares $2.68 (or 5.4%) in after-hours trading on October 19.


Agreement – Estimate Revisions
Estimates for fiscal 2010 are on the upswing, manifesting a reflection of the strong third quarter results and the company’s upbeat guidance. Out of 28 analysts covering the stock, 21 have hiked their estimates over the past week while just 1 made a negative revision, reflecting a strong directional agreement.

For fiscal 2011, estimates are clearly inclined towards the positive side with 12 analysts (out of 30) having raised their forecasts over the last 7 days and 5 moving in the opposite direction.

The sustained double-digit growth at MedSurg, improving margins and management’s optimistic outlook inspires optimism among the analysts. The upswing in estimate revisions, which indicates healthy performances moving forward not only brings a meaningful impact on the Zacks Rank, but also reflects the potential for significant upward pressure on the stock.

On the flip side, a soft orthopedic industry, price and procedure volume slowdown in the reconstructive implant and spine markets and foreign exchange headwinds have prompted some analysts to tread with caution.

Magnitude – Consensus Estimate Trend
A plethora of upward estimate revisions accompanied by a sheer directional concurrence have led to an increase in the estimates for fiscal 2010, which have gone up by 2 cents over the past week. However, despite a large number of positive revisions, the magnitude of revisions for fiscal 2011 has been torpid over the same timeframe. The current Zacks Consensus Estimate for fiscal 2010 is $3.28, representing an estimated 11.34% year-over-year growth.

Stryker in Neutral Territory
Stryker is one of the world’s largest medical devices companies operating in the global orthopedic market and armed with a well-diversified product portfolio. The company keeps on introducing new products (such as the new hip systems: Restoration ADM and Rejuvenate) at regular intervals to boost growth. Moreover, Stryker continues to expand its product range by acquiring complementary products or businesses.

The recent acquisition of privately-held medical products maker Gaymar Industries has offered a leeway to broaden Stryker’s acute-care product offerings. Moreover, the company is reportedly negotiating with Boston Scientific (BSX) to buy the latter’s pain management devices business (neuromodulation unit) for roughly $1.5 billion.

However, Stryker faces stiff challenges from Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp. (CNMD), Biomet and DePuy, a division of Johnson & Johnson (JNJ) in a highly competitive orthopedic industry. Notably, its spinal implant products are facing the heat in a market where rival offerings continue to make in-roads, hurting the company’s market share.

Moving forward, we feel that Strykershould benefit from new product launches and the improving hospital capital spending backdrop, which has rebounded from a slowdown at the height of the recession. However, the general sluggishness in the orthopedic market represents a key concern.

Moreover, Stryker faces pricing and volume pressure on its hip, knee and spine products.The replacement hips and knees markets continue to be affected by the lingering economic softness and the near-term outlook for volume growth is bleak. Stryker’s spine business, in particular, is worst hit by price/volume headwinds.

While acknowledging the strength at MedSurg, we remain cautious about sustained price/volume pressure, sluggish European markets and a soft reconstructive implant market, which could potentially dent future earnings. As such, we remain Neutral on the stock, which is supported by the short-term Zacks #3 Rank (Hold).

Source: Earnings Scorecard: Stryker Corp.