Long-term investing is generally the way to go, but that does not mean that investors shouldn't take advantage of short-term moves that work in their favor. Stryker (NYSE: SYK ) remains a very well-run company in the med-tech space, with good exposure to orthopedics, surgical instruments, and neurology, but a recent slide in the stock appears to have opened up a little window of opportunity in the shares.
First quarter earnings weren't a disaster
Stryker did report a miss across multiple line-items for the first quarter, but that certainly doesn't make it a horrible quarter. That's even more the case when factoring in the likelihood that many procedures were postponed or delayed by the poor winter weather.
Revenue rose about 5% as reported and 5% on an organic basis, coming in just a bit shy of sell-side expectations. Price pressure remains a factor (pricing was down 2% overall), while volumes are rebounding (up 7%) and particularly in overseas markets.
Stryker saw gross margin decline 60bp (0.6%), missing expectations by 30bp. Operating income was a little more complicated, as analysts take one of two different approaches to adjusting the numbers – the more conservative approach results in 2% yoy growth, while the more aggressive approach results in 4% yoy growth. Either way, the company did spend less on SG&A than the sell-side expected, recapturing much of the earnings leverage lost earlier in the income statement.
A little weak in the knees
Stryker's performance in Recon wasn't so great, with revenue missing sell-side expectations by about 4% on weaker knee sales and implied MAKO revenue. Hip revenue rose 3%, a strong result compared to the sub-3% growth for Johnson & Johnson (NYSE: JNJ ) , Zimmer (NYSE: ZMH ) , Biomet, and Smith & Nephew.
Knees weren't nearly as strong, with sales down about 1% on an adjusted organic basis and well short of Johnson & Johnson, Zimmer, and Biomet. With Johnson & Johnson and Zimmer rolling out new knee product families, it wasn't a total shock that Stryker came in a little soft, but it was still a miss all the same.
Trauma looked solid for Stryker, with revenue up about 8% as reported. Stryker's trauma-oriented lower extremity business saw very good growth (up 34%), consistent with an extremities market that continues to deliver growth well above that in the major joints.
Plenty on the drawing board
Judging by management's comments at the recent AAOS meeting, Stryker is going to be busy on the product development front. The company has started a clinical trial for a robotic total knee system (with MAKO) that the company hopes to launch in 2015. While not a make-or-break product, Wall Street will be watching this closely to see whether Stryker really can make robotic orthopedic surgery a differentiating factor in a fiercely competitive market.
Stryker also had some comments regarding the spine business (up 1% in the first quarter). The company has a new expandable cage product for spinal surgery (AccuLIF) and remains committed to building out its minimally invasive spine product business through internal development, but also seems to acknowledge that a scale-boosting acquisition is likely in the future. As a reminder, Stryker is a pretty distant #3 in the spine space, trailing well behind Medtronic and Johnson & Johnson.
Buy, build, or both?
Zimmer recently made a major move to shake up the ortho space when it announced an agreement to acquire Biomet. This move will effectively consolidate the hip and knee market to a three-horse race between Johnson & Johnson, Zimmer, and Stryker; Smith & Nephew technically makes it four, but the company is falling further behind and is going to have a hard time competing without some bold moves of its own.
As a rather acquisitive company in its own right, I doubt Stryker is done. Acquisitions to build up its spine and/or extremity business would make sense, and the company's sizable presence in surgical tools, instruments, and medical equipment (where sales rose 6% this quarter) creates a wide field of potentially worthwhile transactions.
The bottom line
Stryker shares have pulled back from an early April high and look a little more interesting at these levels. These shares are not at all likely to generate a quick double, but for investors looking for a good long-term holding supported by healthy margins and competitive market positions in multiple markets, Stryker looks appealing at this price.
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