Earnings Preview: Stryker

Orthopedic devices giant Stryker Corporation (SYK) is expected to release its fourth quarter and fiscal 2010 results on January 25, after the closing bell. The Michigan-based company announced, on January 10, encouraging preliminary sales data for the quarter and fiscal year, which beat the Zacks Consensus Estimates. Revenues for both fourth quarter and fiscal 2010 grew nearly 9% to $2 billion and $7.32 billion, respectively.

Global Orthopedic Implants sales grew 4.5% in the fourth quarter reflecting signs of recovery in this business. Hips, knees and trauma franchises posted growth in the quarter while the spine business continued to disappoint. Worldwide revenues for MedSurg Equipment, Stryker’s growth business, soared roughly 15% in the quarter.

Stryker raised its adjusted earnings guidance for fiscal 2010, which it now envisions to range between $3.31 and $3.33 a share compared to the earlier view of $3.27 and $3.30. Moreover, the company has released a buoyant outlook for fiscal 2011. The current Zacks Consensus Estimates for fourth quarter and fiscal 2010 are 90 cents and $3.31, respectively.

Third-Quarter Flashback

Stryker posted better-than-expected third quarter 2010 results with earnings of 80 cents per share surpassing the Zacks Consensus Estimate of 77 cents. Net income jumped 47.5% year over year led by sustained healthy sales from the MedSurg division.

Revenues grew 6.9% year over year to $1,768 million, also exceeding the Zacks Consensus Estimate of $1,749 million. However, strong growth at MedSurg was partly masked by yet another sluggish performance by the core Orthopedic division due to weak spine and knees sales.

Stryker’s domestic sales benefited in the quarter from higher shipments of orthopedic implants and surgical equipment while international revenue growth was muted on account of an unfavorable foreign exchange translation effect.

Estimate Revisions Trend


Earnings estimates for fourth-quarter 2010 have been static over the past week with no movements in either direction. However, there has been a clear upswing over the last 30 days, mostly attributable to the strong preliminary sales and the company’s upbeat guidance.

Out of 27 analysts covering the stock, 11 have raised their estimates over the past month with just 1 moving in the opposite direction, manifesting a strong directional consensus. The analysts are expecting Stryker to outperform based on the solid revenue performance.

Similarly, for fiscal 2010, 13 out of 21 analysts have hiked their forecasts over the last 30 days while 1 lowered his/her estimate. There has been a solitary positive revision over the past 7 days with no reverse movements.


The magnitude of revisions for the forthcoming quarter and fiscal year has been torpid over the last week. However, a plethora of upward estimate revisions accompanied by a sheer directional pressure have led to an increase in the estimates for the fourth quarter and fiscal 2010 by 1 cent and 2 cents, respectively, over the past 30 days.

With respect to earnings surprises, Stryker has posted two positive surprises in the preceding four quarters while it met the Zacks Consensus Estimates on two other occasions. The company has produced an average positive earnings surprise of 3.23% over the last four quarters, implying that it has beat the Zacks Consensus Estimate by that measure.

Neutral on Stryker

Stryker is one of the world’s largest medical devices companies with a well-diversified product portfolio. It continues to expand its product range by acquiring complementary products/businesses. Stryker remains well positioned for growth across its Orthopedic and MedSurg units driven by new product launches, acquisitions and an improving hospital capital spending backdrop.

The company’s MedSurg division continues to grow at a healthy double-digit rate, benefiting from the synergies of the acquisition of Ascent Healthcare. The MedSurg business continues to show resilience in a still challenging macroeconomic backdrop.

With the sale of its bone growth product franchise (“OP-1” product line) to Tokyo-based equipment manufacturer Olympus Corporation, Stryker plans to redirect a part of the related R&D spending to other internal projects, which it believes has the potential to deliver better returns.

Moreover, Stryker remains committed to delivering incremental returns to investors leveraging its solid balance sheet, healthy free cash flow and earnings power. The company, in December 2010, raised its quarterly dividend by 20% and announced an additional $500 million share repurchase program.

Stryker recently unfolded an optimistic outlook for fiscal 2011 with revenues expected to grow 11-13% in constant currency on the back of higher shipments of Orthopedic Implants and MedSurg Equipment coupled with the contribution from its recently acquired neurovascular business of Boston Scientific (BSX).

However, Stryker faces stiff challenges from Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp (CNMD), Biomet and DePuy, a division of Johnson & Johnson (JNJ), in a highly competitive orthopedic industry.

Moreover, Stryker is exposed to pricing and volume pressure on its hip, knee and spine products and a still soft reconstructive implant market, which could potentially dent future earnings.The general sluggishness in the orthopedic market represents a key concern. This is reflected in our long-term Neutral recommendation for the stock, which is supported by a short-term Zacks #3 Rank (Hold).

STRYKER CORP (SYK): Free Stock Analysis Report

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