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Stryker (SYK) Down despite Q3 Earnings and Revenue Beat

Zacks Equity Research

Stryker Corp SYK reported adjusted earnings of $1.39 per share in the third quarter of 2016, which comfortably beat the Zacks Consensus Estimate by 2 cents and improved 11.2% from the year-ago quarter. Notably, shares of Stryker fell 0.7% to close at $109.72, following the earnings release.

However the adjusted earnings figure was also better than management’s guided range. The upside was primarily driven by a 17.1% surge in revenues to $2.83 billion.

Notably, revenues beat the Zacks Consensus Estimate of $2.81 billion as well. At constant currency (cc), net sales improved 16.7% from the year-ago quarter.

 

 

Quarter Highlights

MAKO results in the quarter were solid, with almost 30 global installations of robots, with 23 in the U.S. This represents almost a 75% year-over-year increase.

Since the limited market release for the Total Knee platform, Stryker has successfully performed over 200 cases in the platform.

Stryker is well poised with the acquisitions of both Sage and Physio-Control in the recent past. Per management, the acquisitions should help the company to drive stronger organic sales growth in the coming quarters.

Segment Details

Organic sales growth was 6.2% in the quarter, with U.S. sales increasing 6%, courtesy of solid performances by MedSurg and Neurotech. International segments posted growth of 6.7% on strong momentum in Europe and a return to growth in emerging markets. Management expects strong performance in Europe, Canada and Australia.

Orthopedic - Sales increased 5.3% at cc to $1.07 billion, driven by a 6.3% rise in Knees sales and 6.9% growth in Trauma & Extremities. Hips sales inched up 1% while other sales increased 13.2%.

In the U.S., the company witnessed organic growth of 4.7% in this platform driven by 6.9% increase in Trauma and Extremities and 5.1% growth in knees. Growth has been fuelled by solid performances in 3D printed products, Foot and Ankle portfolio, and the MAKO platform. Notably, Stryker sold 30 Mako robots including seven outside the U.S. during the quarter. Robust procedure growth in both partial knees and hips using MAKO was also encouraging.

MedSurg - Sales surged 33% at cc to $1.25 billion. Excluding the impact of acquisitions, MedSurg posted organic growth of 7.3%. Medical, Endoscopy, Instruments and Sustainability sales improved 121.4%, 10.4%, 5.2% and 10.3%, respectively.

The strong performance in the Instruments platform was driven by its waste management business, the newly launched Neptune 3 and a solid navigation business. Coming to Endoscopy, growth was fueled by double-digits, courtesy of its camera and light source products, and strong communications, sports medicine, and proCare service businesses.

The Medical division of MedSurg was primarily buoyed by double-digit growth of core bed and power cot products.

Internationally, MedSurg organic sales growth was 6% in the quarter, driven by strong European and Australian sales and ‘easing of the MedSurg comparable in China’.

Neurotechnology and Spine - Segment sales increased 8.7% at cc to $503 million, primarily owing to an 11.7% surge in Neurotechnology sales, which include neurovascular, CMF and NSE. Spine sales increased 4.2% on a year-over-year basis in the quarter under review.

In the U.S., Neurotech sales growth was robust at 9.1%, driven by continued strong demand for neurovascular products, neuropowered instruments and AIS products.

Globally, Neurotech had constant currency growth of 16.7%, courtesy of continued demand for Trevo stent retriever and Target coil products in Europe and Asia.

Coming to the Spine business, International growth was 1.6%, partially dampened by persistent challenges in China. The U.S. spine business experienced certain product supply issues. However, management noted solid demand for its newer 3D printed Tritanium products.

STRYKER CORP Price, Consensus and EPS Surprise

 

STRYKER CORP Price, Consensus and EPS Surprise | STRYKER CORP Quote

Margins

Adjusted gross margin was 66.3%, down 60 basis points (bps) on a year-over-year basis, thanks to acquisitions and foreign currency exchange.

Research and development (R&D) expenses, as a percentage of sales, increased 10 bps to 6.5%, as the company continues to invest in internal innovation.

SG&A for the third quarter, as a percentage of revenues, expanded 70 bps to 34.9% on a year-over-year basis, primarily due to sales mix and operating efficiencies.

Notably, operating margin accounted for 24.9% of revenues and remained flat year over year.  Strong operating performance was offset by business mix, pricing and foreign exchange in the quarter.

Guidance

For the fourth quarter of 2016, Stryker expects adjusted earnings in the range of $1.73–$1.78 per share. An unfavorable foreign exchange rate is expected to impact earnings by 0.5% in the full year, although it is forecasted to have a neutral impact on quarterly sales.

Stryker expects organic sales growth of 6% to 6.5% for full-year 2016.

Adjusted net earnings are projected in the band of $5.75 to $5.80 for the full year compared with the earlier guidance of $5.70 to $5.80.

Our Take

We believe Stryker’s innovative product pipeline will be a key catalyst in the near term. Growing adoption of MAKO will drive sales in the orthopedic and reconstructive surgery market.

On the flip side, China might prove to be a challenging market for the company. Coming to supply side headwinds, the company has been grappling with supply issues in the spine business for long. We believe this may prove to be a major drawback in the quarters ahead.

Nevertheless, Stryker’s efforts on sales force management should bode well.

Zacks Rank and Key Picks

Currently, Stryker carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the broader medical sector are Intuitive Surgical Inc. ISRG, AngioDynamics Inc. ANGO and Glaukos Corporation GKOS. Notably, AngioDynamics and Glaukos sport a Zacks Rank #1 (Strong Buy) while Intuitive Surgical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical has a long-term expected earnings growth rate of approximately 11.35%. The stock represents an impressive one-year return of 35.6%.

AngioDynamics has a long-term expected earnings growth rate of 15.00%. The company posted a solid one-year return of almost 25.8%.

Glaukos Corporation recorded a stellar one-year return of almost 66.09%. Notably, the company posted positive surprises in the past four quarters, the average being 110.93%.

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