2 Medical Device Earnings, 1 Look Into the Future

Earnings season always provides a great measure for investors to examine noteworthy companies, and with fourth-quarter reports coming out left and right in the health care sector this week, two big-name medical device companies announced hit-and-miss results that investors in the sector need to watch. Let's see how Stryker (NYSE: SYK  ) and St. Jude Medical (NYSE: STJ  ) stacked up in the fourth quarter -- and what their past results tell us about what the future holds for these companies and the medical device industry as a whole.

Stryker strikes the mark
Stryker's fourth quarter hit every mark -- as long as you leave out some rather costly recall charges.

On one hand, the company's revenue did quite well, painting a pretty picture of growth. Sales jumped 5.5% in the fourth quarter -- more than 6% if currency adjustments are taken into account -- to $2.3 billion. Not bad at all; however, one-time charges hit earnings pretty badly. Quarterly earnings fell 33% to $270 million from more than $400 million a year ago, driven down by last year's recall of its Rejuvenate and ABG III hip implant products.

Not to fret, Stryker investors: Without one-time items, adjusted earnings of $1.14 per share beat out median expectations by $0.01. Revenue also beat expectations significantly. While the numbers haven't moved the stock much after the company confirmed its full-year guidance, Stryker did hit a new 52-week high today after its recent run-up in past months.

Investors should really cheer on Stryker's orthopedics business. After the third quarter's weakness around the entire orthopedics industry, the company's reconstructive division posted a 7.4% gain this quarter. With fierce competition in that industry, it's imperative that Stryker continues to see gains -- particularly in the domestic market, where sales rose 8.7% in the fourth quarter.

Stryker's international sales didn't do much without currency issues accounted for, but with the company's recent purchase of Chinese spine and trauma product maker Trauson Holdings, Stryker's making the right moves to expand its global reach.

St. Jude's under the weather
St. Jude was also up to bat, but unlike Stryker, this company's quarter wasn't such a clean-cut success story.

The company recorded $1.37 billion in revenue for the fourth quarter, right in line with analyst estimations. Sales actually fell year-over-year -- down 2%, 1% with currency issues accounted for -- and shares of the company ended up falling slightly during the day on the news.

Cost-cutting measures helped earnings stay afloat, however. The company's adjusted EPS mark beat its 2011 Q4 result by $0.06 and also managed to slightly top analyst projections. Total profit did dip, however, falling 8% year-over-year.

A familiar foe hurt St. Jude across the board -- and it's one that deserves a close look. The company's cardiac rhythm management, or CRM, business lost 6% in year-over-year sales in what's become an ominous trend for the company in recent quarters. Sales of implantable cardioverter defibrillators fell 3% in that category, although St. Jude didn't lose any market share, according to the company. Defibrillator sales haven't been doing well across the country, increasing pressure on St. Jude and its rivals in the CRM business.

The company's atrial fibrillation segment did manage to post solid sales growth of 10%, but its revenues are still less than half of the CRM division. Despite St. Jude's optimism in producing strong earnings growth in 2013, if the company can't turn around its largest segment, it could be in trouble for the near future.

Signs for the future
So, what's all this mean to the medical device industry at large -- and to your portfolio?

First off, the CRM industry is not a safe place to be right now. St. Jude is hardly the only company having trouble here: Medtronic (NYSE: MDT  ) last quarter also saw sales of its cardiac rhythm disease management business decline 3% in what was otherwise a decent quarter; for the six months that ended then, sales were down 4%. Things are even worse over at Boston Scientific (NYSE: BSX  ) ; Stryker's competitor has seen CRM sales plunge 10% over the first nine months of 2012, and 8% alone last quarter. ICD sales, like at St. Jude, are also down.

Boston Scientific's and Medtronic's earnings will clear up the CRM picture, but right now, this is one seriously ill industry.

Stryker's earnings -- in particular, its orthopedics results -- offer investors hope, however. The market for knee and hip implants hasn't been on fire recently, with sales slowing in recent years. It's not just Stryker; robotic surgical maker MAKO Surgical (UNKNOWN: MAKO.DL  ) has struggled recently in its quest to reach profitability in the orthopedics market. But Stryker's success in the area in the fourth quarter -- coupled with MAKO's respectable sales of 15 RIO surgical devices in the fourth quarter (enough for the company to meet its full-year guidance), is indicative of at least a temporary comeback for players in the hip and knee replacement industry.

It may not last, but for right now, the orthopedics market may be ready to return to respectability. With an aging population and rising rates of obesity, Stryker and its competitors could see a new rise in demand for joint replacement in the near future.

Who's the better pick?
Stryker and St. Jude aren't competitors, but the former's earnings look a whole lot better than the latter's. St. Jude could very well continue to struggle, particularly if atrial fibrillation is the only business seeing sales growth as it was this quarter. Meanwhile, the orthopedics nugget of hope might not be the startling success Stryker investors wanted, but the company's moves abroad (such as the Trauson deal) and good, if not great, financial results have it sitting on solid ground.

In a tale of two companies, Stryker's looking healthy -- while St. Jude could use a trip to the doctor.

The orthopedics market may be ready to rise -- and help out Stryker -- but it hasn't done much for MAKO Surgical's stock in the past few months. The recent sell-off of MAKO shares has many wondering whether the potential growth prospects of the robotic surgery company make this stock a buy or a stock to stay away from. To answer this question, Fool.com analyst and MAKO expert David Meier has authored a premium research report covering all of the must-know details on the company, including key areas to watch and risks looming in the future. As an added bonus, David will keep you informed with a full year of updates and guidance on MAKO Surgical as news breaks. Click here now to learn more and start reading.


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