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Orthopedic giant Stryker Corporation (SYK) is scheduled to unveil its third-quarter fiscal 2011 results after the closing gong on Wednesday, October 19. The Michigan-based company envisions foreign currency to favorably impact sales by roughly 2.5%-3.5% in the quarter. The current Zacks Consensus Estimate for revenues and earnings for the third quarter are $2,035 million and 89 cents a share, respectively.

Second Quarter Flashback

Stryker’s second-quarter fiscal 2011 adjusted (excluding acquisition-related charges) earnings per share of 90 cents matched the Zacks Consensus Estimate. Profit (as reported) for the quarter dipped 3.1% on account of $43 million in charges associated the company’s acquisition of Orthovita and Boston Scientific’s (BSX) neurovascular business.

Revenues spiked roughly 16% year over year to $2,045.5 million, beating the Zacks Consensus Estimate of $2,007 million. Sales from Reconstructive division rose 7.4% in the quarter. However, barring the favorable foreign exchange translation impact, revenues from this business increased just 1.8%. Growth in the hips, trauma and extremities franchises was partly masked by a weak knee business.

MedSurg revenues surged 15% in the quarter, boosted by strong sales of the company’s bed and stretcher offerings as well as acquisitions. Revenues from the new Neurotechnology and Spine business catapulted roughly 53% in the quarter. Stryker reaffirmed its fiscal 2011 revenues and adjusted earnings guidance.

Estimate Revisions Trend

Agreement

Estimates for the third quarter demonstrate limited movements over the last 7 days with just one (out of total 26 analysts) having raised his/her estimate while none moving in the reverse direction.

Over the last 30 days, there have been a couple of negative revisions accompanied by a solitary reverse movement. An identical trend is observed for the estimate for fiscal 2011 over the past week and month. The current Zacks Consensus Estimate for the third quarter (of 89 cents) represents an estimated 11.06% year-over-year growth.

Magnitude

Given the relative lack of revisions, the estimate for the upcoming quarter has been static over the last week and month. Similar trend applies to the estimate for fiscal 2011 which stays at $3.71 a share over the corresponding periods.

With respect to earnings surprises, Stryker has posted three positive surprises in the preceding four quarters while it met the Zacks Consensus Estimate on one occasion. The company has produced an average positive earnings surprise of 2.78% over the last four quarters, implying that it has beat the Zacks Consensus Estimate by that measure.

Our View

We believe that Stryker is poised for growth riding on new products, acquisitions and a stable-to-improving hospital capital spending environment, which has recovered from a slowdown at the height of the recession. Its MedSurg unit continues to grow at a healthy quarterly run rate, benefiting from the synergies of the Ascent Healthcare acquisition.

Stryker is on an acquisition spree to spur growth as its faces sustained pricing and procedure volume pressure in its core replacement hips and knees businesses. The acquisition of Boston Scientific’s neurovascular assets has enabled the company to diversify its portfolio. We expect an update on its acquisition integration and synergies in the third quarter call.

We feel that new products including the hip systems, ADM Restoration and MDM X3 (Modular Dual Mobility), to favorably impact Stryker’s third quarter sales. 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 forthcoming quarter. Although the company's knee franchise has struggled through the first half, the new OtisMed pre-op surgical cutting guides are expected to trigger recuperation in this business in the third quarter. However, Stryker’s spine franchise is expected to remain affected by pricing/volume and reimbursement pressure.

However, Stryker faces stiff challenges from Zimmer Holdings (ZMH), Biomet, Johnson & Johnson’s (JNJ) DePuy and Smith & Nephew (SNN) in a highly competitive orthopedic industry. Moreover, implant pricing and elective procedure volume still remain headwinds and may continue to impinge growth in the third quarter.

The reconstructive market fundamentals remain challenging given a host of macro issues including high unemployment. We expect the company to provide an insight on the pricing/volume as well as capital spending trend and outlook in its third quarter commentary. Our long-term Neutral recommendation on Stryker is in line with a short-term Zacks #3 Rank (Hold).

Source: Stryker: Earnings Preview