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Is This Powerhouse Medical Devices Stock a Buy?

By Kody Kester – Nov 23, 2021 at 8:00AM

Key Points

  • The company held up well considering the impact of the Delta variant on elective procedures in Q3.
  • Stryker is a solvent business, which means it can weather almost any unfavorable situation.
  • Despite a strong growth profile, it is priced below the average medical device industry stock.

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Stryker is one of the largest medical device companies in the world, yet it appears to have plenty of growth left in the tank.

What's one of the best ways to play the growing and aging global population? I would argue that since an older population will require more access to healthcare, it's difficult to go wrong with medical device stocks. In fact, market research firm Fortune Business Insights' forecast that the global medical devices market will grow 5.4% annually from $455.3 billion in revenue this year to $658 billion by 2028.

The large-cap medical devices stock Stryker (SYK 6.84%) is one stock that should do well in the years ahead. So, let's take a look at whether the stock is currently a buy.

A team of surgeons work in the operating room.

Image source: Getty Images.

Stryker grew despite the Delta variant surge

Stryker slightly missed analysts' revenue and non-GAAP (adjusted) earnings-per-share (EPS) estimates when it reported its third-quarter results on Oct. 28 for the period ended Sep. 30. The company reported $4.16 billion in net sales during Q3, which worked out to an 11.3% growth rate against the year-ago period. Factoring out the added revenue from the Wright Medical Group acquisition that closed last November, Stryker still grew its revenue 4.5% year over year on an organic basis. However, Stryker fell 1.7% short of the analyst revenue consensus of $4.23 billion. Even so, Stryker has exceeded analysts' forecasts eight out of the last ten quarters. 

While a revenue miss is the last thing that a company wants to happen in a quarter, Stryker performed pretty well considering the circumstances. The Delta variant surged in the U.S. in Q3 which Vice President of Investor Relations Preston Wells indicated in his opening remarks of Stryker's Q3 2021 earnings call. Wells said the following regarding the Delta variant's impact on the business: "During the quarter, significant spikes of the COVID-19 Delta variant drove increased infections and hospitalizations that require higher hospital bed utilization, which ultimately led to the deferral of elective procedures."

Stryker is a medical device company that offers a variety of products to healthcare facilities used in elective procedures. The deferral of elective procedures during the Delta variant surges is what led the company to fail to meet analysts' expectations.

Despite the challenges faced in Q3, Stryker managed to grow its adjusted EPS by 2.8% year over year to $2.20. Similar to revenue, this adjusted EPS figure came up 3.5% shy of the analyst consensus of $2.28 in adjusted EPS. This was only the second quarter out of the past ten that Stryker fell short of the analyst-adjusted EPS consensus. And Stryker is forecasting midpoint-adjusted EPS of $9.11 for this year, which would represent 22.6% growth compared to last year, and even a healthy 10.3% growth rate against the pre-pandemic year of 2019. 

Solvency is gradually improving to pre-acquisition levels

Stryker has successfully navigated the challenges of the pandemic to this point. But let's dig into the company's solvency using the interest coverage ratio to see if it's strong enough to withstand another major surge in the Delta variant or an emerging variant that's potentially more contagious and deadly. The interest coverage ratio measures the extent to which a company can pay its interest expenses from its earnings before interest and taxes (EBIT).

The company's interest coverage ratio in the first nine months of this year was 7.3 ($1.77 billion in EBIT/$241 million in interest costs). This is a reasonably high interest coverage ratio, which provides Stryker with a buffer to remain solvent through almost any adverse event. As the company continues to deleverage in the aftermath of its acquisition of Wright Medical Group, and COVID-related disruptions eventually fade away, the interest-coverage ratio should increase further.

Growth at a reasonable valuation

Stryker appears to be a quality stock based on its fundamentals. But in order for investors to be successful in the long term, they must insist upon not significantly overpaying for a stock. One way to consider this is to examine the stock's valuation.

Based on analysts' forecasts for next year and Stryker's current $262 share price, the stock is trading at a forward price-to-earnings (P/E) ratio of 25.8. This is moderately lower than the forward P/E ratio of 28.4 for the medical devices industry among 136 selected stocks. Since Stryker's annual earnings growth forecast over the next five years of 13.6% ranks it 36 out of 136, the stock should arguably be priced at a higher valuation multiple.

Investors looking to buy a stock trading at an unjustified discount to its industry based on its fundamentals should consider buying Stryker. In the meantime, patient investors can collect a modest 1% dividend yield while they await the market to award the stock with an increased valuation. 

Kody Kester has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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