Stryker's Momentum Continues to Build

 | Dec 10, 2013 | 1:00 PM EST  | Comments
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Stryker (SYK) has fully participated in the strong, broad-based market rally of 2013.

While we continue to be bullish on the market, we are wary about chasing most of this year's winners. However, we do believe that Stryker has more room to rally.

From 2008 to 2012, fundamentals slowed at Stryker's core med-surgical and orthopedic implants businesses. In med-surgical operations, hospitals deferred routine capital spending programs on new instruments for surgery and endoscopy, which are key business franchises for Stryker. In orthopedic implants, in a choppy economy, individual consumers deferred hip and knee implant decisions.

To management's credit, Stryker was able to offset this broad-based slowdown with strategic acquisitions that boost both its top and bottom lines. Some of the key deals included Boston Scientific's (BSX) neurovascular division, Ascent Healthcare, Orthovita, Concentric Medical and the recently announced Mako Surgical deal. As a result of these initiatives, Stryker's revenue grew a respectable 34% to $9 billion, from $6.7 billion. Earnings per share rose 54% to $4.30, from $2.79. 

As the economy continues to mend and the Affordable Care Act begins to ramp up, we expect Stryker's core organic growth rate to accelerate. The company announced earnings this quarter that were in line with general expectations: $2.1 billion in revenue and earnings per share of $0.98. Management affirmed guidance for the year of a revenue increase of 4.5% to 5.5%, and EPS to be in the $4.20 to $4.26 range. The numbers are quite good, especially if one adjusts for negative foreign-exchange rates and U.S. medical device tax headwinds.

Management continues to have a positive tone going into both the fourth quarter and 2014. Any expressed frustrations revolved around external factors affecting the company, from macro headwinds to volatile foreign-exchange issues and one-time tax effects. 

Fortunately, notwithstanding short-term frustrations and near-term slow business, we believe the company is poised for better business trends in 2014. The company continues to gain global market share with new product innovations and strategic acquisitions. Sales should also be aided by rebounding hospital spending, a growing emerging-market footprint and increased consumer confidence to undergo needed orthopedic surgeries. 

Bottom line, we like Stryker. The stock is reasonably priced at 15.9x 2014's EPS estimate of $4.70. Although the company pays a modest dividend of only 1.6%, we do expect it to grow at double-digit rates. Both the earnings and P/E multiple should grow from current levels.

Stryker's favorable valuation and improving fundamentals should provide attractive long-term capital appreciation potential. Stryker is worth a serious look.

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Using this year's estimate to make a P/E is pretty standard. Basing a multiple on 2015's projected EPS is not ...

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