Such is the fate of original equipment manufacturers: When times are good for the industries they serve, times are great for them. When times are tough for the industries they serve, times can get really ugly for the suppliers. We've seen it with electronics assemblers like Flextronics (NASDAQ:FLEX) and Jabil (NYSE:JBL), we've seen it with cardiac rhythm management components supplier Greatbatch (NYSE:GB), and we're seeing it today with orthopedics OEM supplier Symmetry Medical (NYSE:SMA).
Every once in a while in an investing lifetime, you will dodge bullets that come close enough to parting your hair. Symmetry Medical was one of those for me. I liked the company's leading market share in providing things like trays, instruments, and implants to the orthopedics industry. I also liked a top-notch roster of customers like Smith & Nephew (NYSE:SNN), Medtronic (NYSE:MDT), and Stryker (NYSE:SYK). What I didn't like was the current state of the orthopedics sector, and that's what stopped me from investing in this company.
When the orthopedics space catches cold, a company like Symmetry Medical can catch double pneumonia. In the second quarter, reported revenue dropped nearly 8% and the drop in comparable organic revenue was more on the order of 13%. As with most other med-tech companies, trouble at the top line filters down throughout the income statement. In this case, gross margins fell 4.5 percentage points and operating income dropped by nearly one-third.
Bad enough as that is, management is looking for it to get even worse. Guidance for the rest of the year looks about 10% lower than the current median for revenue and more than 20% lower on EPS.
This may be a case, though, where patience pays off. The orthopedics sector is navigating a pothole in the road now, but the wheels are not coming off. Moreover, while OEM businesses are often highly competitive, Symmetry Medical didn't build its market share by accident. Also, the company is looking to expand into other medical fields and potentially expand its small (but fast-growing) aerospace business. For investors looking for a higher-return/higher-volatility play on orthopedics with somewhat less company-specific risk, this could be the time to check out Symmetry Medical.
For more Foolish medical missives:
- Smith & Nephew: Better Is Good Enough
- Stryker and the Terror of the Unknown
- The Market's 10 Best Stocks
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
