Orthopedic devices major Stryker Corporation (SYK) is slated to release its third-quarter fiscal 2010 results on Tuesday, October 19, 2010. Although the company has not released any official guidance for the third quarter, it envisages foreign currency exchange to drag net sales by 1% to 2% in the quarter. Despite concerns over its Orthopedic unit, Stryker remains confident about meeting its sales expectation for fiscal 2010.
The current Zacks Consensus Estimate for third-quarter is 77 cents, representing an estimated 11.32% year-over-year growth. With respect to earnings surprise, Stryker has posted one positive surprise in the preceding four quarters while it met the Zacks Consensus Estimate on three other occasions.
Stryker reported second-quarter earnings per share of 80 cents matching the Zacks Consensus Estimate while surpassing the year-ago earnings of 73 cents. Higher sales from the MedSurg Equipment business catalyzed a 9.5% growth in net income. However, on the flipside, sales (of $1,758 million) missed the Zacks Consensus Estimate as healthy growth at MedSurg was marred by a sluggish orthopedic business.
Orthopedic Implants business struggled in the quarter with revenues increasing by a mere 2.2%, impacted by weak hips, knees and spinal devices sales and pricing pressure. The sunny side of this was the encouraging growth in trauma products.
Stryker’s MedSurg Equipment division continues to post double-digit growth with revenues cruising at 16% year-over-year led by the acquisition of Ascent Healthcare (purchased in late 2009 for $525 million). The company backed its sales and earnings guidance for fiscal 2010 in its second-quarter commentary.
Estimate Revisions Trend
Estimates for the third quarter have inclined towards the positive side over the last week. Out of 26 analysts covering the stock, 2 have raised their estimates with 1 moving in the opposite direction. Conversely, over the past month, estimates have edged towards the negative side with 4 (out of 26) analysts lowering their estimates while 3 making positive revisions.
For fiscal 2010, 2 out of 30 analysts have cut down their forecast over the last 7 days while 1 has raised his/her estimate. Over the past month, estimates manifest a clear directional pressure with 6 analysts (out of 30) having pruned their earnings estimates with a couple of reverse movements.
Positive revisions are fuelled by the encouraging prospects in the company’s MedSurg division (driven by Ascent), supported by new product launches across spine and hip businesses. On the contrary, the bearish sentiment reflects pricing and procedure volume pressure on the spinal business and the macro headwinds emanating from a still constrained hospital purchasing environment. Moreover, the company’s European sales have been mired by discontinued product lines and termination of certain distribution channels.
The magnitude of revisions for the forthcoming quarter has plateaued over the last week and month. A similar trend applies for fiscal 2010 with estimates remaining static for the same time periods. The current Zacks Consensus Estimate for fiscal 2010 is $3.26, reflecting an estimated annualized growth of 10.46%.
Neutral on Stryker
Stryker is one of the world’s largest medical devices companies operating in the global orthopedic space. The company’s well-diversified product portfolio is a natural hedge against the risk of revenue shortfall in a volatile economy. Stryker continues to expand its product range by acquiring complementary products/businesses.
However, Stryker faces stiff challenges from the likes of Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp (CNMD), Biomet and Wright Medical (WMGI) in an intensely competitive orthopedic industry. Moreover, the company is experiencing price pressure on its hip, knee and spine products. Stryker’s spinal implants franchise, in particular, is facing the heat in a market where rival offerings continue to make in-roads.
Well feel Stryker remains well positioned for growth across its Orthopedic and MedSurg divisions driven by new products (including the recently launched two new hip systems) and acquisitions. The company’s MedSurg division benefits from the synergies from the acquisition of Ascent Healthcare, a market leader in the reprocessing and remanufacturing of medical devices.
Stryker recently inked a deal with New York-based Endoscopy product maker Vision-Sciences Inc (VSCI). The deal provides exclusive rights to distribute urology-focused endoscopy products in North America, South America, China and Japan. This represents a compelling opportunity as higher shipments of endoscopic systems are meaningfully contributing to the healthy sales growth at MedSurg division.
However, competition-driven pricing pressure on implant products and a still soft capital spending backdrop could potentially weigh on future earnings. This is reflected in our long-term Neutral recommendation for the stock, which is supported by a short-term Zacks #3 Rank (Hold).