The first time I heard of the company Stryker SYK was actually in 2013 when I was raising finance for a client of ours and Stryker was one of the companies we spoke to as they were investing heavily in that field.
At that time I remembered thinking that this is a really good company and this was confirmed after I read the accounts of how they assisted the Japanese after the earthquake.
In terms of their current performance, they lead the industry average in all of the key areas especially in relation to margin, their EBIDTA margin is 26.7% compared to the industry average of 15.9%.
It is their ability to extract higher margins that makes them more profitable than the others. In terms of their returns on equity, they with 16.82% and St Judes Medical Inc STJ with 21.6% are far ahead of their industry competitors like Amedica Corp AMDA with -226.24%.
I do not believe that the ROE of 16.82% is indicative of the strength of the Stryker Company because they are a very acquisitive company and in the short term, this can drag down ROE percentage and with a market cap of $42.57BLN, they are proving themselves to be surprisingly nimble in the market by competing successfully with their younger and smaller competitors.
Their net income has remained stable averaging at about $1.2 bln every year apart from 2014, they also have had a lot of free cash available, over the years and they have been averaging about $1.3 bln in free cash flow. This suggests a business with a strong core and for those looking for a good dividends play, their dividend pay-out has grown by about 5% on average year on year since 2011.
In this article, it is my thesis that Stryker's shares are currently undervalued and still have room to develop to the upside.
I have a number of reasons for this assertion-;
They are in a growing market especially as the global elderly population increases. It has been estimated that by 2050, the elderly population will increase to 1.5 billion and be about 15% of the global population.
This trend is well known and the effects on the medical industry is also well known. What is still yet unclear is firstly what specific opportunities can one identify in this trend? Secondly, how can one take advantage of these opportunities?
Orthopaedics is a major area of growth when it comes to the process of identifying opportunities. Stryker's conventional orthopaedics segment contributed 42% to its earnings last year which is in line with its yearly average.
I am seeing Stryker develop a more unconventional orthopaedic strategy to capture more growth in profitability and this will be done in relation to the neurotechnology and spine segment which currently contributes 18% to the total earnings.
This is the segment where I believe we will greater growth and this is the area in which the company is also fixing its attention particularly when we look at its greater focus on robotics.
Robotics, AI and Smart Data
The core market for a company like Stryker is the elderly which are now approaching 1bn strong globally.
Finding the best methods to reach and service this market effectively is something completely different.
Stryker's business is being assisted by a convergence of three powerful factors which are the rapid development of robotic technology, artificial intelligence and smart data.
It is my belief that over the next 24 months, we will see a significant shift in Stryker's business as they will focus more and more on robotics which will utilize both AI and smart data.
According to the Robot report
"It is estimated that the medical robotic systems industry will reach a conservative value of $13.6 billion in 2018, growing at a compounded annual growth rate of 12.6% from 2012. Surgical robots are expected to enjoy the largest revenue share.
The global market for these medical robotic systems are driven by factors that I have mentioned above such as technological advancement in the automation of the healthcare industry, increase in elderly population, non-invasive surgical techniques, and high prevalence of motion-restricting medical conditions.
The main medical robotic systems include: surgical robots, non-invasive radiosurgery robotic systems, prosthetics and exoskeletons, assistive and rehabilitation robots, non-medical robotics in hospitals and emergency response robotic systems, and hold high growth potential in the global market"
With Stryker's global reach and broad customer profiles, it is perfectly placed to spearhead and benefit significantly from this global growth. We have only begun to see this with relation to Mako robotic arm assisted surgery but this will develop more with regards to spinal and neuro rehabilitation.
"According to the FDA, the use of robotics in the U.S. has increased from 25,000 per year in 2005 to 450,000 in 2012. Furthermore, according to data published by the National Cancer Institute it is estimated that in 2014, nearly 80% of prostatectomies were performed using robotics compared to only 1% of all prostatectomies in the year 2001. Increasing adoption of technologically advanced systems is expected to drive demand over the forecast period.
Currently, North America dominates in terms of revenue in 2014 at over 40% owing to growing demand for robot-assisted surgeries, presence of sophisticated healthcare infrastructure accompanied by high healthcare expenditure levels in the region. Growing acceptance of assisted surgeries in an array of surgical applications is poised to gain immense importance in the arms of surgeons.
While the Asia Pacific medical robotic systems market is expected to grow at the fastest rate during the forecast period due presence of untapped opportunities, constantly improving healthcare infrastructure, and high patient awareness levels are some of the key rendering factors attributing to industry growth"
It is also my belief that Europe holds a very big opportunity for these types of products, services and systems.
Considering all of the foregoing, it is my assertion that as these various trends converge, it will also help Stryker to shift gears and enter into a new level of profitability and also attain higher margins because the technological developments will cause their costs to fall while profitability rises.
As I have said before, Stryker are very active acquirers of businesses in what is a very exciting industry so with their investments, they get access to a lot of the new technologies and what is very remarkable with Stryker is how they are very strong in integrating a newly acquired entity and using this to release value across the entire value chain.
It is this ability that sets them apart from their competitors and results in them achieving superior profitability compared to their peers.
It is my expectation that we should see Stryker's share price reach $150 per share within the next 24 months, there will be a small consolidation in the very short term but I expect the upwards trend to continue as there is a lot of room for the company to grow.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.