Stryker and the Terror of the Unknown

This has been a pretty bad year to be a good medical technology company. Johnson & Johnson (NYSE: JNJ  ) is down on fears of slowing overall growth. Medtronic (NYSE: MDT  ) is a victim of a slowdown in the implantable cardioverter defibrillator market and, perhaps, its own overheated valuation in the past. And then there's Stryker (NYSE: SYK  ) , on the wrong side of both pricing worries and an industry-wide investigation from the DOJ. No big surprise, then, that this stock is down almost 20% over the past year.

I'll talk about some of the longer-term fears in a moment, but let's look at the quarter report first. Once again, Stryker managed to get the job done. Revenue rose 9% and the company reported that this was purely from volume and mix -- price momentum was essentially nil. Margins improved yet again and the company saw operating income rise more than 16% and net income more than 20%.

As has been the case before in recent times, the medical equipment business did most of the heavy lifting. Orthopedic implant sales were up a bit less than 7% as flat performance in hips continues to weigh down the double-digit growth in the knee, trauma, and spine businesses. With the MedSurg business, though, revenue rose over 14% as instrumentation, endoscopy, and medical segments all posted double-digit revenue growth.

So, what about that future for Stryker? The newish Triathlon system continues to boost the knee franchise, and the company is about to start rolling out a hip resurfacing system in international markets that could spark that segment a little bit. There's also the big unknown that is OP-1 -- a biotech product that has been long in coming.

On the pricing front, though, there could still be danger. I have no idea what the Justice Department investigation will uncover, but I do know that greater pricing transparency could be a threat. Simply put, one hospital may pay much more (or less) for a Stryker hip or a Zimmer (NYSE: ZMH  ) knee than a rival hospital in the same region. It's not necessarily illegal or unethical (particularly when price differences can be tied to volume), but it does raise the risk that pricing power could be muted for some time to come.

Stryker will eventually get through all of this, but I don't claim to know when that will be. In the meantime, I'm still a big fan of Stryker, but I have to point out that Zimmer shares seem like the better relative bargain today -- even if you project less growth for them than for Stryker.

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Fool contributor Stephen Simpson owns shares of Johnson & Johnson, but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares). The Fool has an ironclad disclosure policy.

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