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Stryker (SYK) Up 0.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
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It has been about a month since the last earnings report for Stryker (SYK). Shares have added about 0.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Stryker due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Stryker Q1 Earnings Beat Estimates, Revenues In Line

Stryker Corporation delivered first-quarter 2019 adjusted earnings per share (EPS) of $1.88, beating the Zacks Consensus Estimate by 2.2%. The bottom line improved 11.9% year over year and exceeded the high end of the company’s guidance range.

The Michigan-based medical device company reported revenues of $3.52 billion, which were in line with the Zacks Consensus Estimate. Revenues increased 8.5% on a year-over-year basis and 10.6% at constant currency (cc).

The company delivered organic growth of more than 7% in the quarter under review, which helped it sustain the multi-year momentum across its businesses and regions.

Revenues by Geography

Revenues in United States came in at $2.58 billion, up 11.5% year over year. International sales were up 1.1% to $937 million.

Both U.S. organic sales and international organic sales grew approximately 7% on the back of performances in emerging markets and Europe.

Segmental Analysis

Orthopaedic: In the quarter under review, revenues in the segment totaled $1.25 billion, up 2.8% year over year. The segment’s revenues grew 5.1% at cc. The performance was driven by better results at the Knee sub segment. The company continues to witness solid demand for Mako TKA (Total Knee Arthoplasty) platform or cementless knee and other 3D printed products.

MedSurg: This segment reported sales of $1.54 billion, up 8.2% year over year. Sales at the segment increased 10% at cc. Per management, the segment grew 8.9% organically in the reported quarter, led by strong Endoscopy, Instruments and Medical performances.

Neurotechnology & Spine: Sales in the segment grossed $722 million, up 20.7% year over year and 23.2% at cc. Organically, the segment witnessed growth of 7.8%. Per management, the upside was driven by K2M acquisition and sustained strong demand in Europe, China and other emerging markets.

Margins

In the first quarter, gross profit totaled $2.28 billion, 6.8% from the year-ago quarter. Adjusted gross margin was 65.8%, down 50 bps.

Operating income totaled $528 million, down 10.7% from the prior-year quarter. Adjusted operating margin 25.1%, up 10 bps.

Financial Update

Cash and cash equivalents came in at $1.67 billion, which plunged 53.7% from the 2018-end level.

Cash flow from operating activities as of Mar 31, 2019, came in at $313 million, up 5.4% from the year-ago quarter.

2019 Outlook

Based on the first-quarter performance the company now expects the following:

Stryker expects 2019 organic net sales growth in the range of 6.8-7.5%.

On a full-year basis, adjusted EPS is expected in the band of $8.05 to $8.20. The Zacks Consensus Estimate is pegged at $8.13, within the company’s guided range.

For the second quarter of 2019, adjusted EPS is anticipated within $1.90 and $1.95. The Zacks Consensus Estimate stands at $1.95, within the company’s projected range.

Wrapping Up

Stryker exited the first quarter of 2019 on a solid note, with earnings surpassing the consensus mark and revenues increasing on a year-over-year basis. The company continues to gain from its core MedSurg unit which put up a strong show in the reported quarter. Additionally, strength in flagship Mako platform continues to favor the company. Moreover, its K2M acquisition drove the core Neurotechnology & Spine unit in the quarter under review. Solid international growth also buoys optimism. Expansion in operating margin is a positive while a strong outlook for 2019 is indicative of bright prospects.

Meanwhile, contraction in gross margin raises concern. Additionally, first-quarter revenues were impacted by unfavorable foreign currency movement. Pricing pressure also continues to plague Stryker. Stiff competition in the MedTech space is likely to mar prospects.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Stryker has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Stryker has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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