Stryker: Sustainable Growth Ahead As Baby Boomers Age

Stryker (SYK), the maker of orthopedic products and specialty medical devices, had another quality earnings announcement. Earnings were in line with analyst estimates at 55 cents per share. Revenue of 1.453 billion came in at the top end of expectations when compared to the 1.39 billion estimate. The company also re-affirmed guidance of $2.40 per share for the full year 2007. All in all, the earnings announcement was slightly better than expected.

With revenue coming in slightly higher than anticipated and re-affirmed guidance for full year 2007, the stock price seems cheap here. Shares were up marginally to $72.50 in after hours trading. A lack of pop in after hours trading was likely the result of earnings being "baked" into the stock.

Shareholders expected earnings to be in line with previously issued guidance. Furthermore, recent market weakness may have contributed to the lack of reaction to earnings. Finally, shares have run up close to 50% in the past year. When profit-takers get digested Stryker could make another move higher in the next 6-months.

Looking at trends in the United States and around the world it is clear that there is a growing need for orthopedic products. As the baby boomer generation begins retiring in coming years, the need for hip, knee and joint replacement products will increase. Statistics prove that people are living longer than they did years ago. However, joints in the human body wear down before death. Basically, the minds and organs of people outlive the structural parts of their body.

Because of this simple fact, demand for reconstructive implants should only increase in the future. This means bright times are ahead for companies like Stryker. On the downside, an informal SEC probe was announced last week examining practices between U.S. Surgeons and orthopedic device makers. Biomet Orthopedics (BMET), Johnson and Johnson (JNJ), Smith & Nephew (SNN) and Zimmer Holdings (ZMH) agreed to pay a combined $310 million settlement on charges that they gave surgeons incentives known as "kickbacks" to boost product sales.

Fortunately, Stryker was not charged and it fully complied with the Department of Justice's investigation. This probe is one of the few things that could hold Stryker back. If the company can come out of this ordeal completely clean it should positively affect earnings in the future. Share price could also immediately appreciate if the company gets the "all clear" signal from the DOJ.

Stryker seems undervalued here when compared to its main competitor Zimmer Holdings based on earnings growth. Furthermore, the company seems to have a slightly better technical picture. Stryker recently broke out of a 6-month consolidation base. Although shares are undervalued at current level, the best risk/reward entry is at the $70.00 support level. Stryker has sustainable growth and a favorable technical picture. These two assets make it a stock you should own heading into 2008.

Disclosure: At the time of this publication I owned shares of Stryker Corp (SYK) at an average cost basis of $71.22. I also plan on adding to my position the week of 10/22/07.