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Orthopedic devices giant Stryker Corporation’s (SYK - Analyst Report) third-quarter 2011 adjusted (excluding acquisition charges) earnings per share of 91 cents topped the Zacks Consensus Estimate of 89 cents and the year-ago earnings of 80 cents.
Third Quarter Flashback
Profit (as reported) dipped 3% year over year, hit by a $25 million charge associated with the company’s takeover of Orthovita, Memometal Technologies and Boston Scientific’s (BSX - Analyst Report) Neurovascular business.
Revenues jumped roughly 15% year over year to $2,031 million, essentially in line with the Zacks Consensus Estimate. The healthy growth was triggered by higher sales across the board, strongly backed by acquisitions.
Sales from the company’s Reconstructive unit rose 8% in the quarter (up 3.9% barring the currency exchange translation impact). Growth across the hips, trauma and extremities segments coupled with contributions from acquisitions was, in part, masked by a still-weak knee business.
Revenues from the MedSurg division spiked 12% (up 9.8% in constant currency) year over year, buoyed by healthy demand for the company’s bed and stretcher offerings.
Neurotechnology and Spine products sales zoomed roughly 46% (up 43% in constant currency) year over year, boosted by the acquisition of Boston Scientific’s Neurovascular asset. Stryker raised its earnings forecast for fiscal 2011 and modestly tweaked its revenues outlook for the year.
We have discussed the quarterly results at length here: Stryker's EPS Trounces, Net Dips
Agreement – Estimate Revisions
Estimates for Stryker have barely moved over the past week. Out of 26 analysts covering the stock, just one has raised his/her earnings estimate for fiscal 2011 over the past 7 days with none moving in the opposite direction. Estimates for the fourth quarter reveal an identical trend.
Estimates for 2011 demonstrate a strong positive bias over the last 30 days with 17 (out of 26) analysts having lifted their forecasts with a sole reverse movement. The bullishness reflects the company’s upward guidance revision and visibility for improved growth through new products. For the fourth quarter, estimates are negatively inclined over the past month with 9 analysts lowering their forecasts accompanied by 4 positive revisions.
Magnitude – Consensus Estimate Trend
Given the relative lack of activity, estimates for the fourth quarter and fiscal 2011 have been torpid over the last week. However, there has been an increase of a couple of cents in the estimate for fiscal 2011 over the past 30 days, given the strong positive directional consensus. The current Zacks Consensus Estimates for the fourth quarter and 2011 are $1.03 and $3.73, respectively.
Neutral on Stryker
Stryker, one of the largest medical devices makers on the planet, continues to perform reasonably well in a challenging operating environment leveraging a well diversified product portfolio. We believe that the company is poised for growth riding on new products, acquisitions and recovery in capital spending by hospitals.
New products including the MDM X3 (Modular Dual Mobility) hip system are expected to favorably impact Stryker’s results in 2011. Moreover, the ongoing shift from metal-on-metal (MoM) hip implants to next-generation hip systems represents a tailwind for the company.
Given its less MoM exposure, Stryker is well placed to gain share in the hip market vis-à-vis its highly exposed counterparts such as Johnson and Johnson’s (JNJ - Analyst Report) DePuy, Wright Medical (WMGI - Analyst Report) and privately-held Biomet.
While Stryker’s knee franchise is still struggling, the new OtisMed pre-op surgical cutting guides should rekindle growth in this business. However, Stryker’s spine franchise remains affected by pricing/volume and reimbursement pressure.
The company’s MedSurg division continues its healthy growth momentum fueled by the Ascent acquisition. Demand for bed and stretcher offerings remained healthy, driven by favorable hospital replacement/upgrade cycle.
The Neurotechnology and Spine division is growing at a solid pace, benefiting from the roll out of the next-generation Target detachable coils (for occluding blood flow in vascular abnormalities).
Stryker is on an acquisition binge pressed by sustained pricing and procedure volume pressure in its core replacement hips and knees businesses. The $1.5 billion acquisition of Boston Scientific’s neurovascular assets has enabled the company to diversify its portfolio. Stryker so far has completed four acquisitions in the current fiscal and is focusing on integrating those buyouts.
Stryker remains committed to delivering incremental returns to investors leveraging a solid balance sheet, healthy free cash flow and earnings power. Management’s outlook for fiscal 2011 remains favorable with revenues expected to grow at a double-digit clip in constant currency.
However, Stryker operates in a highly competitive orthopedic industry. Moreover, it remains challenged by the sustained lumpiness in the reconstructive implant market and pricing and elective procedure volume still remains headwinds. Pricing remains an issue with company-wide selling prices dipping 2% globally in the third quarter.
Moreover, sustained patient deferral of elective procedures, impacted by a host of macro issues including high unemployment rate and expiry of health insurance, is impacting the demand for hip and knee implants. We also account for the dilutive impact of acquisition-related charges. Our long-term Neutral recommendation on the stock is in agreement with a short-term Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.
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