Did Stryker's Earnings Make the Cut This Quarter?

Earnings season is in full swing, and it's been an up-and-down ride so far for major health care stocks. Medical device maker Stryker (NYSE: SYK  ) was on tap yesterday after the closing bell, with Wall Street analysts hoping the company could avoid European woes hurting the sector. Let's go inside the company's third-quarter results and see if it beat the estimates.

Growth and disappointment
On one hand, Stryker did manage to grow in several  key metrics. Revenue rose to $2.05 billion, beating last year's third quarter even while declining slightly from the $2.1 billion figure from Q2 2012. The company also grew net profit, recording a $353 million figure versus last year's third-quarter mark of $327 million. This quarter also marked a gain from the second quarter's $325 million profit.

Unfortunately for Stryker and its shareholders, Wall Street had expected more. Stryker's EPS mark of $0.97 per share missed expectations by $0.01. Revenue, which analysts had projected at $2.13 billion, similarly missed.

The fall below expectations contributed to Stryker's dip in after-hours trading, leading Oppenheimer & Co. to downgrade the stock to "market perform," also known as hold. What should you take away from this mixed report going ahead?

What hit the hardest?
Following in the steps of fellow medical  device makers Intuitive Surgical (Nasdaq: ISRG  ) and Edwards Lifesciences (NYSE: EW  ) , Stryker management cited Europe as a major stumbling block. The continent's economic mess has hurt medical device makers recently and helped push Stryker to lower its guidance for the rest of the year. As CEO Kevin Lobo said on the European  hurdle, "We expect market conditions to remain challenging in Europe and for capital equipment..." Southern Europe and Germany in particular weighed on sales.

As with Johnson & Johnson's (NYSE: JNJ  ) recent quarterly report, Stryker also experienced headaches over currency fluctuations. The company expects sales to be hit by 0.5% to 1.5% for the full year if currency levels stay at their current exchange rates. The medical device excise tax, a controversial part of the coming Patient Protection and Affordable Care Act coming in January, will also hurt the company to the tune of $100 million annually, according to Lobo.

Several segments of the company performed well, but Stryker's division results ended up mixed. While the company's spine and neurological branch grew by 5% this quarter and its MedSurg equipment branch drove growth by 2%, its largest business declined. Revenue of reconstructive products, accounting for $891 million in sales this quarter, fell by 1%.

What's ahead
Looking ahead, Stryker no longer expects double-digit growth to be possible with the excise tax planned to hit and with European sales likely to continue sagging. Instead, the company has targeted full-year EPS growth of between 5% and 8% for 2013.

Like many medical device corporations, Stryker will need to adjust its approach to international sales in order to continue profitable growth abroad. Lobo answered succinctly with his company's plan, stating, "We're going to be taking more aggressive action." For investors, however, caution over both Europe and the effects of the excise tax are warranted.

While medical device makers like Stryker can deliver windfalls with innovative products, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Fool contributor Dan Carroll has no positions in the stocks mentioned above. The Motley Fool owns shares of Intuitive Surgical and Johnson & Johnson. Motley Fool newsletter services recommend Intuitive Surgical and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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