Orthopedic devices giant Stryker Corporation (SYK) reported better-than-expected fourth-quarter fiscal 2010 results with adjusted (excluding one-time charges) earnings per share of 93 cents, above the Zacks Consensus Estimate of 90 cents.
Highlights from the Quarter
Profit (as reported) for the quarter clipped 3.6% on account of a hefty impairment charge associated with the company’s divestiture of its bone growth product franchise (the “OP-1” product line) to Tokyo-based equipment maker Olympus Corporation and higher expenses.
Revenues rose 8.8% year over year to $1,995 million, boosted by healthy growth in Stryker’s domestic sales and sustained double-digit growth at the MedSurg unit. While the company’s hips and knees businesses posted growth in the quarter, its spine franchise remained sluggish.
Stryker backed its fiscal 2011 outlook, released on January 10, with revenues expected to grow 11%-13% year over year while adjusted earnings are forecast to increase 10%-13%. However, despite the forecast-beating earnings and a buoyant outlook, Stryker’s shares fell in after-hours trading on October 25, underscoring the concerns over pricing pressure in the orthopedic business and the lower fourth quarter profit.Agreement – Estimate Revisions
Estimates for fiscal 2011 are on the upswing following the fourth quarter results, mostly reflecting the company’s upbeat guidance. Out of 28 analysts covering the stock, 13 have raised their estimates over the past week with just a single reverse movement, manifesting a sheer directional consensus.
Likewise, for fiscal 2012, estimates are inclined towards the positive side with 9 analysts (out of 24) having lifted their forecasts over the last 7 days with 3 moving in the opposite direction.
Strong momentum at MedSurg, management’s optimistic guidance for fiscal 2011 coupled with an improved visibility for the company’s Orthopaedic Implants business (based on the recovery observed in the fourth quarter) inspire bullishness among the analysts. The upward estimate revisions, which indicate healthy performances moving forward, pose a meaningful impact on the Zacks Rank.
Magnitude – Consensus Estimate Trend
Strong positive analyst opinions accompanied by a comprehensive directional agreement have led to an increase in the estimates for fiscal 2011, which have gone up by 2 cents over the past week.
Similarly, estimates for fiscal 2012 have increased by 3 cents over the same timeframe. The current Zacks Consensus Estimate for fiscal 2011 is $3.71, representing an estimated 11.34% year over year growth.
Stryker Stays Neutral
Stryker is one of the world’s largest medical devices companies and is armed with a well diversified product portfolio that continue to perform well in a challenging operating environment. We believe that the company is poised for growth across its Orthopedic and MedSurg units driven by new product launches, acquisitions and an improving hospital capital spending backdrop.
The MedSurg division continues to grow at a healthy double-digit rate, benefiting from the synergies of the Ascent Healthcare acquisition. Recovery in hospital spending represents a tailwind for this division. Moreover, new products including the hip systems, Restoration ADM and Rejuvenate, and the much-anticipated launch of the OtisMed surgical cutting guides are expected to favorably impact results in fiscal 2011.
Stryker is expanding its product portfolio by acquiring complementary businesses. The $1.5 billion acquisition of Boston Scientific’s (BSX) neurovascular unit has provided the company a leeway to diversify into a fast-growing therapy markets.
The acquired business complements Stryker’s neurosurgery products range and positions it as the leading player in the neurovascular market.
With the divestiture of the OP-1 business, Stryker will redirect a part of the related R&D spending to other internal projects having the potential to deliver better returns, representing a positive step. We feel that new products coupled with acquisitions should help Stryker in expanding its top line moving forward.
However, Stryker faces stiff challenges from Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp (CNMD), Biomet and Johnson and Johnson’s (JNJ) DePuy in a highly competitive orthopedic industry. Moreover, the company remains exposed to pricing and procedure volume pressure on its hip, knee and spine products.
The joint replacement market remains sluggish as patients defer their elective procedures given the lingering economic softness and high unemployment rate. According to Stryker, company-wide selling prices dipped 2.1% globally in the fourth quarter (down 1.7% in fiscal 2010).
A still-soft reconstructive implant market remains an overhang for the stock. Our long-term Neutral recommendation for Stryker is backed by a short-term Zacks #3 Rank (Hold).