The Bull Case For Stryker Corporation (SYK)

| About: Stryker Corporation (SYK)

Here's a healthcare play which caters to one group that tends to be a little less vulnerable to recessions: wage-earners aged 45 to 65. This sector is in the prime of their wealth-accumulating years, which is a good thing, as people aged 50+ do more than half of all consumer spending.

Stryker Corporation (NYSE:SYK) engages in the development, manufacture, and marketing of orthopedic products and medical specialties worldwide. It operates in two segments, Orthopedic Implants and MedSurg Equipment. (Yahoo Finance)

Catalysts that make SYK a buy:

1) Deloitte estimates that the spending power of Americans aged 50+ is $1.7 trillion. One of the main expenditures of aging consumers is health care. And, as all of the men and women who took up jogging and strenuous exercise in their teens get older, they are putting a lot of stress on their joints. That creates a lot of business for orthopedic surgeons. Stryker (SYK) is a direct beneficiary of this trend

2) The stock price of SYK have risen 25% annually on average over the past 10 years, which is very unusual. Its steady performance has made it an institutional favorite especially in periods when the market has been relatively soft. Although it isn't saying much, SYK is beating the broad market again this year with a 3% gain, and it has survived the recent rout of medical-device stocks with considerable grace.

3) In hospitals around the world there has been a move to improve operating rooms with newer, better equipment as it is more efficient and cost-saving in the long run (New England Journal of Medicine). Additionally, doctors are now doing a much better job with arthroscopic procedures to repair injuries to the soft tissue around joints, such as rotator cuffs, and that will provide incremental new revenue. SYK's surgical business has already jumped to 37% of revenue from the low 30s as recently as 2004 and margins in this field are just fine.

4) Most analysts, including myself, expect SYK to continue to post 20% earnings growth over the next few years as it has diversified its product mix and done a great job of tightening expenses. The market is currently putting an 18X multiple on that growth, which is way down from the premium that orthopedic suppliers used to get, and a big discount from the 28X to 35X multiple that SYK has been given in the past.

Now trading at around $45.75, SYK shares have a decent chance of leaping back toward the top of their range in the $55 to $60 area by this time next year, which would be a 30% move.

If the recent market weakness continues, look for a chance to buy SYK for its next leg higher in the $39 to $43.50 area. (Capital IQ)

SYK 1-yr chart: