Impressive First Quarter Earns Stryker a Hold

Despite its strong first quarter and guidance, analysts have a hold on Stryker (SYK), according to Jaywalk. In short, most sell side and independent analysts think the stock is fairly valued. Their fair value estimates range from $31 to $65 and target prices range from $70 to $78.

SYK closed Wednesday at $64.86. Standard & Poor's gives SYK four out of a possible five stars. Morningstar.com gives Stryker three out of a possible five stars. To that independent research firm, SYK is fairly valued at $65, but it said it may raise its fair value estimate. It says consider buying the stock at $55.30 and consider selling at $78.

Sabrient Research calls the stock a buy, while Rochdale Research and Reuters Research, which usually gives stocks much lower fair value estimates than other independent research firms do, estimates SYK's fair value is $31 based on economic value added and calls it a hold.

Stryker's key statistics are pretty impressive. Its profit margin is 16.95%, operating margin 22.12%, return on assets 12.54% and return on equity 20.62%. Rochdale Research calculates SYK's return on capital at a healthy 16.5%, compared with a 9.5% cost of capital, but that 7 point spread would be down from 2007's 10.5 spread between 18.4% and 7.9%.

Insiders hold an impressive 27.14% of the float. Institutions hold a relatively low 51.4%. Stryker's financial news can be found here. Its web site is here. Its key statistics are here.

Here are the highlights of SYK's first quarter as presented in its news release:

• Net sales increased 14.7% (10.3% constant currency) to $1,634 million
• Orthopaedic Implant sales increased 12.4% (7.3% constant currency)
• MedSurg Equipment sales increased 18.1% (14.9% constant currency)
• Net earnings from continuing operations increased 20.1% from $242 million to $291 million and net earnings increased 19.3% from $244 million to $291 million
• Diluted net earnings per share from continuing operations increased 20.7% from $.58 to $.70

In the same news release, Stryker gave "optimistic" guidance for the rest of 2008:

The Company's outlook for 2008 continues to be optimistic regarding underlying growth rates in orthopaedic procedures and sales growth rates in the Company's broadly based range of products in orthopaedics and other medical specialties, despite the potential for continued pricing pressure in certain markets.

The Company projects that diluted net earnings per share for 2008 will approximate $2.88, an increase of 20% over adjusted diluted net earnings per share from continuing operations of $2.40 in 2007. The financial forecast for 2008 includes a constant currency net sales increase in the range of 11% to 13% as a result of growth in shipments of orthopaedic implants and medsurg equipment. If foreign currency exchange rates hold near March 31, 2008 levels, the Company anticipates a favorable impact on net sales of approximately 4.5% to 5% in the second quarter of 2008 and a favorable impact on net sales of approximately 2.5% to 3.5% for the full year of 2008.

In their conference call with securities analysts, Stryker's executives noted that while some products had a slow quarter, overall, the company performed well.

Stephen P. McMillan, president and CEO, said:

When you step back and look at the current global environment, we think these results stack up pretty well. Simply put, our unique footprint and broad areas of strength once again allowed us to absorb a few body blows, underscoring our ability to deliver in the face of challenges. While hips were disappointing in the quarter, knees were solid. And once again, spine, trauma, and CMF generated growth rates well above their markets, while our dependable MedSurg businesses, Instruments, Endoscopy, and Medical all posted double-digit operational sales growth in the US and globally.

Against a backdrop of concerns about slowdowns in hospital capital expenditures, our MedSurg businesses again posted very healthy 16% growth in the US and this was following very strong results in the previous quarter. This quarter's results really follow the same pattern of the last few years, as strong above-market growth in Spine, Trauma, CMF, Instruments, Endoscopy, and Medical more than made up for slower reconstructive growth. Make no mistake about it though we do look forward to having our hip business join the other high performing franchises, and we will be looking for improvement in the coming quarters.

Striker has scheduled an analysts' day for May 8. In addition to concerns about an FDA recall, which still hasn't been resolved, analysts believe SYK may face the impact of potential Medicare payment cuts to providers using its products and price pressures on some of its core products. Technically, SYK looks weak on its daily, weekly and point and figure charts. The bearish price objective is $45. Click on the SYK chart to see the other charts.

The weak technicals make SYK unattractive to covered call traders. The January 2009 65 strike calls indicated traders think the stock will hit or top $71 before they expire while 65 strike puts point to $59 or lower. Among SYK's close competitors are Johnson & Johnson (JNJ), Smith & Nephew (SNN) and Zimmer Holdings (ZMH).

Full disclosure: I don't own Stryker.