Stryker: Diversify into Healthcare

Tides from last years credit crunch have left investors running to safeguard their portfolio as the global economy weakens and the U.S. economy flirts with the possibility of recession. The healthcare sector is often looked at as a recessionary proof industry, however, the industrial environment is posing its own challenges. I have discussed the FDA delaying approval for many drugs and the trend does not seem to be letting up anytime soon. Paired with regulation, drugs targeting major diseases take some time to develop, further delaying the prospects of revenues. Where do we go as the popular pharma plays face such challenges? Stryker Corporation (SYK) [62.98, 0.00 (0.00%)].

The Business

Stryker Corporation, headquartered in Michigan generates revenues from two major operating segments: Orthopedic Implants and MedSurg Equipment. The company’s presence in medical devices and implants does not necessitate it from standing in the waiting line for FDA approval like the popular healthcare plays. Do not get me wrong, Stryker is answerable to the FDA and has run into some issues with the agency but is positioned better than the popular pharma plays. Between the two segments, Stryker offers a vast array of products to hospitals and medical professionals world wide. The Orthopedic segment is known for its bone growth compounds, major implants: hip, knee, and spine, while the MedSurg Equipment generates revenues from surgical tools and medical equipment. The business is diversified well in the device and implant sub sector and continues to work towards providing quality products and solutions to its customers.

Valuation

The company’s latest quarterly earnings beat expectations and showed great growth despite some set backs. Q2 earnings totaled $306 million with an EPS of $0.73 showing a growth of 27.4% and 25.9% respectively from the previous year. FX Rates also contributed greatly to revenues as a weak dollar offset losses from controversial hip products and FDA related issues. The operating results are great and there is potential for growth as we take a look at some fundamentals.

• Price: $62.98
• EPS (ttm): $2.63
• P/E (ttm): 23.90x
• PEG: .91x
• P/FCF (ttm): 33.24x

All data from Reuters Online.

A low PEG ratio shows significant prospects for growth based on last year’s EPS. Stryker’s closest competitors Medtronic (MDT) [52.18, 0.00 (0.00%)] and Zimmer (ZMH) [69.06, 0.00 (0.00%)] do not have as attractive growth numbers. Fiscal year 2007 showed investors great revenues and income and should continue as we move forward. I like Stryker because of the likelihood that our current lifestyles will result in more hip, spine, knee and other bone reconstruction surgeries. The baby boomers are beginning to retire and as they grow old, they will leverage the sciences to address back and leg problems. Gen Y also is beginning to break into their 20s where health problems from a very active lifestyle can appear with a spike in knee and back problems. Like all investments, we must take a look at the risks associated with Stryker.

Risks

Stryker has been hit with several FDA warning letters regarding facilities located on the East Coast. They are working towards improving quality at its plants. This investment has signaled a decline in margins moving forward but should deter any litigation related to its operations. Other risks associated with Stryker are:

• Rising cost of commodities
  • Metals used in implants and surgical tools
  • Travel and distribution costs will rise as oil becomes more expensive
  • Analyst reports have stated that many large companies have swallowed these costs and could pinch margins.
• Economic slowdowns
  • Consumers will spend less and may put off expensive health related procedures
• FDA related issues
  • Timely approval
    • Bone regeneration
  • Litigation
    • Warnings regarding hip implants that are being reintroduced
    • Facility reviews result in warnings and Stryker has taken appropriate action

The management at Stryker is positioning the company for continued profitability and is making investments to address concerns from the FDA to prevent any further issues. Margins will be affected, but such investments will result in better products that can attract market share from competitors. SYK offers a unique investment opportunity that offers different expsosure than the normal healthcare strategies. I suggest anyone looking to diversify into the healthcare industry take a look at Stryker because of the potential to “stryke” gold.

Disclaimer: The mutual fund the author is associated with is long SYK.

Comments

[CrossProfit:]

Disagree.
See...
SYK www.crossprofit.com/vi...
MDT www.crossprofit.com/vi...
ZMH www.crossprofit.com/vi...

ZMH has numerous issues to deal with, however, for MDT and SYK the environment is going to be tough until way after the November election and a new direction is clearly spelled out.

CrossProfit
Disclosure: No conflicts.

2008 Aug 04 08:56 AM

[ryortho:]

Nope, he's missing the boat. SYK's biologics aren't a factor. it's the basic demand for hip, knee and spine implants. THAT demand is strong and rising. Plus cash flow is outstanding. First baby boomer applied for social security this year. Key to stryker is to buy its equities as cheap as you can. The valuation earlier this year was like buying dollars for 60 cents. hip, knee, spine + hospital beds. SYK has the size and synergies to rise with demand and to maintain margins. Finally, in an economic downturn, demand for new hip, knee or spine surgery rises since insurance (COBRA) extends past lay-offs. Demand falls when economies are recovering since people are getting back to work. SYK is a buy, but not for the reasons this guy trotted out.

2008 Aug 06 02:02 PM

[Victhom:]

Stryker...Medtronic...... Boston Scientific should keep an eye on this small cap from Canada....Just watch this video....you will be impressed....The company is name Victhom Human Bionics....has 2 great products for now like power-knee (Bionic Leg) and Neurostep (to help CVA patient with Stroke to walk more normally)

VHB is trade on TSX (Toronto) only $9M market cap

www.victhom.com/upload...

www.victhom.com/en/pro...

www.victhom.com/news/2...
www.victhom.com/news/2...

2008 Aug 09 12:27 AM