'Tis the season for company to pre-announce earnings and it always feels like there are more warnings than positive surprises. Moreover, with the JPMorgan (NYSE: JPM) Healthcare Conference going on, many healthcare companies are apt to be giving the Street a look at both how the end of 2011 went and how 2012 is looking. To that end, Stryker (NYSE: SYK) is shaping up as a solid defensive name for investors looking for healthcare exposure.
The Details Of The Quarter
Stryker's early announcement of fourth quarter were results were largely consistent with what most investors were already expecting … at least in a macro sense. The company announced that reported revenue would be up 11%, just shy of the average estimate of 11.7%, with organic growth up a little more than 4%.
The company's MedSurg business did surprisingly well (up 11%), but it's not immediately clear if that was a byproduct of instrument sales (which would be encouraging for Johnson & Johnson (NYSE: JNJ) , Covidien (NYSE: COV), and Conmed (Nasdaq: CNMD)) or patient handling equipment (which would be better for Medtronic (NYSE: MDT) and Hill-Rom (NYSE: HRC)).
Neuro and spine was also strong, with sales up about 47% for the quarter. Although Stryker has had to deal with some competitive product launches from Covidien and a generally more challening environment for spinal care, this is a pretty encouraging result.
Last and least, the orthopedic business was up less than 1%, but then at least it was positive. Investors may feel a little whipsawed here, what with Integra LifeSciences (Nasdaq: IART) issuing poor guidance and Tornier (Nasdaq: TRNX) guiding above expectations. Both of those companies are active in niche markets like extremities; the core hip and knee businesses of major ortho companies like Stryker, JNJ, Zimmer (NYSE: ZMH), and Biomet are not doing well as patient volume stays low, hospitals push back on pricing, and hospitals also have gotten a good deal more conservative with procedures in the wake of DoJ investigations.
2012 Looking Familiar
At this point, it looks like 2012 is shaping up as expected as well. Management's guidance was basically consistent with existing expectations, albeit a bit light perhaps on organic revenue growth (2 to 5%). The orthopedic business just isn't turning around with any speed and odds are that there are more downside risks on pricing than upside risk in volumes.
But at least Stryker has a few things going for it. The neuro/spine business is growing well and suggesting that what it needed more than anything was the good management and TLC that Boston Scientific (NYSE: BSX) couldn't provide. Elsewhere, the company's low exposure to Europe (about 12% of sales) mitigates the issues over there with government reimbursement and pricing push-backs.
Longer Term – More Of The Same?
Stryker has had a pretty clear and consistent model for many years now, and investors should not look for much in the way of change. Stryker has always balanced internal growth with acquisitions and it stands to reason that the company is going to keep several irons in the fire. As just one example, management has intimated that they could conceivably be interested in orthopedic robotics, but feel that IP would not block them from developing their own systems as opposed to buying MAKO Surgical (Nasdaq: MAKO).
The Bottom Line
Stryker has done pretty well in the last month, taking a little luster off the valuation. Granted, the stock is still cheap relative to its long-term prospects, but just not as cheap as it was nor as cheap as Covidien and St. Jude (NYSE: STJ) look today. Frankly all three look good, with St. Jude offering a bit more R&D-generated long-term pizazz, Covidien offering more near-term execution, and Stryker somewhere in the middle.
Disclosure: I am long JPM.