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Earnings Preview: Stryker

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Medical technologies major Stryker Corporation (SYK) is slated to report its second quarter fiscal 2012 results after the closing bell on Wednesday, July 18. The current Zacks Consensus Estimate for the second quarter is 98 cents, representing estimated year-over-year growth of 9.34%.

First Quarter Flashback

Stryker’s first-quarter 2012 adjusted earnings per share of 99 cents was in line with the Zacks Consensus Estimate and exceeded the year-ago earnings of 90 cents a share. The Michigan-based orthopedic devices major’s profit (as reported) jumped 14% to $350 million (or 91 cents a share) in the quarter on the back of balanced revenues generated across both segments and geography.

Revenues rose 7.2% (up 7.4% in terms of constant currency) year over year to $2,161 million, beating the Zacks Consensus Estimate of $2,115 million. Growth was backed by balanced upticks across all segments, acquisitions and a diverse portfolio of products. These were partially offset by prices changes and currency fluctuations.

Sales from the company’s core Reconstructive unit increased 5.2% in the quarter to $958 million led by growth in trauma and extremities franchise. Hips and Knees sales showed signs of improvement in the quarter but the company expects continued pricing pressure in this segment.

MedSurg sales increased 7.5% (up 7.9% in constant currency) to $821 million in the quarter, supported by solid gains from Sustainability Solutions and the launch of System 7 power tools. Stryker’s Neurotechnology and Spine business soared 12.4% (up 12.3% in constant currency) to $382 million on the back of acquisitions, higher unit volume and favorable product mix, which were partially offset by changes in price.

Estimate Revisions Trend


Estimates for the second quarter demonstrate some amount of activity over the past week and month. Out of the 22 analysts covering the stock, 1 made a negative revision over the last 7 days and 3 in the last 30 days. However, there was 1 upward revision in the last 7 as well as 30 days.  

For the full year, out of the 25 analysts, there were 3 and 6 cases of downward revisions in the last 7 and 30 days, respectively. There were no instances of upward revision.


Following the downward bias in estimate revisions, the Zacks Consensus Estimate for the upcoming quarter dropped by a penny from the previous 7 and 30 days estimates of 99 cents. A flat trend is witnessed in the estimate for fiscal 2012, which stays at $4.11 a share over the corresponding periods. 

With respect to earnings surprises, Stryker has posted one positive surprise in the preceding four quarters while it met the Zacks Consensus Estimate on the other three occasions. The company has produced an average positive earnings surprise of 2.25% over the last four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure. Second quarter earnings are also expected to meet expectations.

Our View

We believe that Stryker is poised for growth powered by a well-diversified portfolio, new products and acquisitions. The company is expanding its product range by acquiring complementary businesses. Stryker was involved in a series of acquisitions in 2011 pressed by sustained pricing and procedure volume pressure in its core replacement Hips and Knees businesses.

We expect new products including the hip systems, ADM Restoration and MDM X3 (Modular Dual Mobility) to favorably impact Stryker’s revenues. The ongoing transition from metal-on-metal (MoM) hip implants to next-generation hip systems represents a tailwind for the company. While Stryker’s knee franchise is still struggling, the new OtisMed pre-op surgical cutting guides should rekindle growth in this business.

Stryker has embarked on several restructuring initiatives (including headcount reduction) in an effort to boost productivity and neutralize costs associated with the implementation of the new government-mandated Medical Device Excise Tax (scheduled in 2013). Moreover, the company remains committed to delivering incremental returns to investors leveraging a solid balance sheet, healthy free cash flow and earnings power.

However, Stryker operates in the highly competitive orthopedic industry and faces strong competition from players like Zimmer (ZMH). Moreover, it remains challenged by the sustained lumpiness in the reconstructive implant market while pricing and elective procedure volume still pose headwinds.

The reconstructive market fundamentals remain challenging given a host of macro issues including high unemployment and expiry of health insurance. We expect the company to provide some color on the pricing/volume as well as capital spending trend in its second quarter commentary. Our Neutral recommendation on Stryker corresponds to a short-term Zacks #3 Rank (Hold).

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