Large-cap medical-device company Stryker (SYK 1.06%) reported revenue that was $160 million higher than average analyst estimates during Q2 2021, as well as adjusted earnings per share (EPS) that came in $0.13 above the analyst consensus forecast of $2.12. Is it a good fit for your portfolio now? Let's dig deeper into the factors that helped Stryker exceed analyst expectations, what to expect moving forward, and the state of Stryker's balance sheet to determine the answer.
Surgical volumes have mostly recovered to 2019 levels
Stryker generated $4.29 billion in net revenue during Q2 2021, compared with analyst estimates of $4.13 billion, which was largely the result of a rebound in surgical volumes. This rebound is best demonstrated by the fact that surgical volumes in May 2021 -- the heart of the second quarter -- were down just 2% from the same time in 2019, showing that more patients have reentered the healthcare system following a COVID-related pause in treatment last year.
For context, Stryker reported $2.76 billion in Q2 2020 revenue, which was the result of COVID-induced delays of elective procedures such as hip and knee replacements.
Due to the deferral of many elective procedures in 2020, I'm inclined to agree with the assessment from Stryker's management during its Q2 2021 earnings call that comparing second-quarter results to 2019 "provides a more relevant point of comparison" for the business. And Stryker's second-quarter revenue more than recovered, growing 17.6% from $3.65 billion in 2019 to $4.29 billion in 2021 (and rebounding 55.4% from its low point in Q2 2020).
Separate of the impact of acquisitions in two of Stryker's segments, including the orthopedics segment and neurotechnology and spine segment, Stryker delivered robust organic revenue growth in the second quarter.
Stryker was able to generate 9.3% organic growth from Q2 2019 to Q2 2021 due to the rebound in surgical volumes and new product launches.
Recent product launches will drive further growth
Contributing to Stryker's robust organic revenue growth in the second quarter was the fact that Stryker has launched five new products since last August, including:
- the Tornier Perform Humeral Stem, for use in shoulder surgery
- the T7 personal protection system (which helps to protect surgeons from infectious bodily fluids and patients from potential infection at the surgical site during a procedure)
- the Procuity wireless hospital bed (aimed at reducing in-hospital falls)
- the Mako Total Hip 4.0 (to improve hip joint implant placements)
- and the Surpass Evolve Flow Diverter (designed to promote brain aneurysm healing)
A fair balance sheet
Stryker's second-quarter operating results and new-product launches are encouraging, but it's just as important to take a look at a company's balance sheet for an indication of how it's faring. As a result, we'll be examining Stryker's interest coverage ratio, which determines the ease with which a company can cover its interest expense with earnings before interest and taxes, or EBIT. A higher ratio is better.
Stryker's interest coverage ratio improved from 4.5 during the adverse impact of COVID-19 in the first half of 2020 ($503 million in EBIT/$112 million in interest expense) to 6.2 through H1 2021 ($1.03 billion in EBIT/$162 million in interest expense).
It will be awhile before Stryker's interest coverage ratio improves to the 10-plus levels it reached in the first half of 2019, but that's because Stryker is acquiring medical-device and biologic company Wright Medical for an enterprise value of $5.4 billion. The deal closed last November, and although Stryker paid $4 billion from its cash reserves, it also took on over $1 billion of Wright Medical's debt. That is how Stryker's long-term debt increased from $12 billion in Q3 2020 (before the close of the acquisition) to $13.2 billion in Q4 2020 (the quarter the acquisition closed), which in turn, led to higher interest expenses and a lower interest coverage ratio.
Stryker is making steady progress on deleveraging its balance sheet. Since the deal with Wright Medical closed last November, it has reduced its long-term debt from $13.2 billion in Q4 2020 to $12.7 billion in Q2 2021.
Stryker is a strong growth pick
Stryker is a good pick for those looking to play the huge backlog of postponed elective surgeries as a result of COVID-19, but the company's continuous product launches should also be able to produce growth for shareholders long after that backlog is gone. Trading at 28 times management's forecast for $9.25-$9.40 in adjusted or non-GAAP EPS this year, Stryker isn't exactly a value play. But it's not unreasonably priced, either; analysts expect 13% annual earnings growth over the next five years.
For more growth-focused investors, Stryker looks like an attractive long-term buy around the current price of $264 a share.