Investors are going to need a little more patience to see an investment in Stryker (SYK) come to fruition. While this diversified med-tech player is actually seeing some solid improvements in its business, 2012 is going to be a year of re-trenching. With a new CEO on the way and some potentially interesting developments in product development, Stryker is still a name to stick with in the healthcare sector.
A Surprisingly Solid First Quarter
Stryker had a pretty respectable quarter with very few spots on it. Reported revenue rose more than 7%, but that whittles down to about 5% on an organic constant-currency basis and drops further to about 3.6% when stripping out an extra selling day. Pricing continues to be tough (down 2%), but volume/mix was surprisingly strong (up nearly 7%).
Stryker continues to manage its profitability reasonably well. Gross margin slid a bit, but operating income rose 4%. As a reminder, Stryker is planning further restructuring throughout 2012 in an effort to drive better profits when patient volumes pick up (presumably later in 2012).
Ortho Seems To Have Bottomed Out … But Will It Be A "U" Or A "V"?
With reports in hand from Biomet, Johnson & Johnson (JNJ), and Stryker, it looks as though the orthopedics industry on the whole has stabilized. Stryker saw about 3% organic growth in ortho, with single-digit growth in hips and knees sweetened with a little extra growth in the trauma and fixation category. At this point it looks as though Stryker is holding its own in the market, but Zimmer (ZMH) and Smith & Nephew (SNN) will have more difficult comps when they report.
While ortho is better, investors shouldn't expect a sharp rebound. Reimbursement is still challenging and while everybody loves the "graying of America" story, it's not as though they're all showing up at the hospital next month for new parts.
MedSurg Not Bad And Likely About To Get Better
MedSurg delivered an 8% sales growth number this quarter, with strong instruments offsetting weaker numbers in endoscopy and beds. The bed number is not a big surprise given Hill-Rom's (HRC) performance, particularly as Stryker has had some good quarters here of late.
With the instruments and endoscopy business, I'm more optimistic about the growth potential as the year progresses. Instruments saw better-than-market growth, suggesting share gains and good acceptance of newer products. This is a market where Stryker has a big share and it looks like its stretching its lead against the likes of Medtronic (MDT), Covidien (COV), and Conmed (CNMD), two of which arguably have bigger fish to fry.
Will Stryker Go Intuitive?
There's an interesting rumor picking up steam out there - that Stryker is developing a surgical robot of its own and may start showing it at next year's AAOS meeting. Now, let me emphasize that this is a rumor and orthos, sales reps, and engineers love to gossip and "bs" as much as anybody.
Based on the buzz (and certain realities of development timelines and challenges), I would expect to it be something akin to MAKO Surgical's (MAKO) RIO and not like Intuitive Surgical's (ISRG) da Vinci. While Stryker will definitely have the marketing muscle to turn a good system into a viable product, MAKO has been out in the market a lot longer and details like features, capabilities, and price will make a major difference.
The Bottom Line
Given where other stocks in the sector are trading, Stryker is still one of my favorite ideas today. It lacks the ortho market share of Zimmer and the new product buzz of Medtronic and St. Jude Medical (STJ), but the valuation is pretty compelling. Assuming that forward growth is only about 60% that of historical growth, I believe Stryker shares are worth close to $70.