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Orthopedic major Stryker Corporation (SYK - Analyst Report) is slated to report its first quarter fiscal 2012 results after the closing bell on Tuesday, April 17. The current Zacks Consensus Estimate for the first quarter is 99 cents.

Fourth Quarter Flashback

Stryker’s fourth-quarter 2011 adjusted earnings per share of $1.02 matched the Zacks Consensus Estimate and exceeded the year-ago earnings of 93 cents a share. The Michigan-based orthopedic devices major’s profit (as reported) shot up 35.9% to $401 million (or $1.05 a share) in the quarter on the heels of strong revenues.

Revenues spurted roughly 11% year over year to $2,215 million, essentially in line with the Zacks Consensus Estimate. The healthy growth was triggered by higher sales across the company’s surgical equipment (“MedSurg”) as well as Neurotechnology and Spine divisions.

Sales from the company’s core Reconstructive unit crept up 1.3% in the quarter (up 0.7% barring the currency exchange translation impact). Growth in trauma and extremities franchise was, in part, masked by weak hip and knee business.

Revenues from the MedSurg division spiked 11.2% (up 11.1% in constant currency) year over year, buoyed by healthy demand for the company’s emergency medical equipment and surgical systems. Neurotechnology and Spine products sales ballooned roughly 47.3% (up 46.8% in constant currency).

Estimate Revisions Trend

Agreement

Estimates for the first quarter demonstrate lack of activity over the past week and month. For the upcoming fiscal year, there was one case of downward revision in each of the prior 7 and 30 days, with no instance of upward revision.

Magnitude

Given the lack of revisions, the estimate for the upcoming quarter has been stationary over the last week and month (at 99 cents a share). A similar flat trend applies to the estimate for fiscal 2012 which stays at $4.11 a share over the corresponding periods. 

With respect to earnings surprises, Stryker has posted two positive surprises in the preceding four quarters while it met the Zacks Consensus Estimate on the other two occasions. The company has produced an average positive earnings surprise of 1.69% over the last four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Our View

We believe that Stryker is poised for growth powered by a well diversified portfolio, new products and acquisitions. The company is expanding its product range by acquiring complementary businesses. Stryker was involved in a series of acquisitions in 2011 pressed by sustained pricing and procedure volume pressure in its core replacement hips and knees businesses.

We expect new products including the hip systems, ADM Restoration and MDM X3 (Modular Dual Mobility) to favorably impact Stryker’s revenues. The ongoing transition from metal-on-metal (MoM) hip implants to next-generation hip systems represents a tailwind for the company. While Stryker’s knee franchise is still struggling, the new OtisMed pre-op surgical cutting guides should rekindle growth in this business.

Stryker has embarked on several restructuring initiatives (including headcount reduction) in an effort to boost productivity and neutralize costs associated with the implementation of the new government-mandated Medical Device Excise Tax (scheduled in 2013). Moreover, the company remains committed to delivering incremental returns to investors leveraging a solid balance sheet, healthy free cash flow and earnings power.

However, Stryker operates in a highly competitive orthopedic industry and faces strong competition from players like Zimmer (ZMH - Analyst Report), Johnson & Johnson’s (JNJ - Analyst Report) DePuy and Smith & Nephew (SNN - Snapshot Report). Moreover, it remains challenged by the sustained lumpiness in the reconstructive implant market while pricing and elective procedure volume still pose headwinds.

The reconstructive market fundamentals remain challenging given a host of macro issues including high unemployment and expiry of health insurance. We expect the company to provide some color on the pricing/volume as well as capital spending trend in its first quarter commentary. Our Neutral recommendation on Stryker is backed by a short-term Zacks #3 Rank (Hold).

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