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Orthopedic devices major Stryker Corporation’s (SYK - Analyst Report) fourth-quarter 2011 adjusted (excluding one-time items) earnings of $1.02 a share came in line with the Zacks Consensus Estimate and transcended the year-ago earnings of 93 cents a share. The Michigan-based company’s profits surged roughly 36%, bucking a declining trend witnessed in the first three quarters of 2011.
Fourth Quarter Revisited
Revenues climbed 11% year over year to $2.2 billion, matching the Zacks Consensus Estimate. The growth was powered by higher sales across the company’s surgical equipment (MedSurg) and Neurotechnology and Spine divisions, backed by higher volume and acquisitions.
Sales from Stryker’s core Reconstructive unit edged up 1.3% (or 0.7% in constant currency) in the fourth quarter. Growth in trauma and extremities franchise coupled with contributions from acquisitions was, in part, masked by weak hip and knee business.
Revenues from the MedSurg segment surged 11.2% (up 11.1% in constant currency), boosted by higher shipments of emergency medical equipment and surgical and endoscopic systems.
Neurotechnology and Spine segment continued its strong growth streak with revenues zooming 47.3% (up 46.8% in constant currency) year over year, paced by acquisitions and higher neurotechnology products shipment. However, Stryker experienced pricing and volume pressure in its spinal implants business.
We have discussed the quarterly results at length here: Stryker Meets in 4Q, Profit Jumps
Agreement – Estimate Revisions
Estimate for Stryker for the current fiscal has been inclined on the negative side. Out of 21 analysts covering the stock, just 1 has lifted his/her estimate for fiscal 2012 over the past 7 days with 3 moving in the reverse direction. Over the past month, 4 analysts have raised their forecast for the year with 9 lowering their estimates.
Estimates for first-quarter 2012 are mostly weighted on the negative side with 7 (out of 24 analysts) downward movements and a couple of positive revisions over the past 7 days. A similar trend was observed over the last 30 days with 8 analysts having pruned their forecasts coupled with 3 reverse movements.
A soft reconstructive implant market, foreign exchange headwinds and acquisition/restructuring related dilution appear to have prompted the analysts to take the bearish stance. On the other hand, visibility for improved growth in 2012 through new products and opportunities for operating leverage inspire optimism among some analysts.
Magnitude – Consensus Estimate Trend
Given the downside pressure from the negative revisions, estimate for fiscal 2012 has reduced by a penny over the last week. For the first quarter, there has been a decrease of a cent in the estimate over the past 7 and 30 days.
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 and acquisitions.
The company’s MedSurg business should benefit from a gradual recovery in capital spending by hospitals as they replace their worn-out equipment. Demand for bed and stretchers remained healthy, driven by favorable hospital replacement/upgrade cycle.
The company is seeing favorable traction for its new hip systems ADM and MDM X3. Moreover, the ongoing shift from metal-on-metal (MoM) hip implants to next-generation hip systems represents a tailwind for Stryker.
Given its less MoM exposure, Stryker is well placed to gain share in the hip market in 2012 vis-à-vis its highly exposed peers such as Johnson and Johnson’s (JNJ - Analyst Report) DePuy, Wright Medical (WMGI - Analyst Report) and privately-held Biomet.
Although Stryker’s knee franchise is still struggling, the new OtisMed pre-op surgical cutting guides are expected to rekindle growth in this business in 2012. However, we expect lingering pressure in the company’s spine business.
Stryker’s Neurotechnology and Spine division is growing at a torrid pace, benefiting from the rollout of the next-generation Target detachable coils (for occluding blood flow in vascular abnormalities).
Stryker was involved in a series of acquisitions last year pressed by sustained pricing and procedure volume pressure in its core replacement hips and knees businesses. The company completed four acquisitions in 2011 and is focusing on integrating those buyouts.
Moreover, Stryker remains committed to delivering incremental returns to investors leveraging a solid balance sheet and healthy free cash flows. The company has also embarked on several restructuring initiatives to boost productivity and neutralize costs associated with the implementation of the new government-mandated Medical Device Excise Tax (scheduled in 2013).
Moreover, Stryker remains challenged by the sustained lumpiness in the reconstructive implant market. The joint replacement market has been hit by patient deferral of elective procedures, impacted by a host of macro issues including a still unstable job market and expiry of health insurance, leading to weak demand for hip and knee implants. The company’s organic growth outlook for fiscal 2012 appears to indicate continued softness in its reconstructive business.
We also account for the dilutive impact of acquisition-related charges on Stryker’s bottom line in 2012. Moreover, foreign exchange swings are expected to have a negative impact on the company’s sales in the current fiscal as reflected in management’s guidance. 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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