Earl's View » Stryker profits

Stryker Meets Earnings Estimates but Costs Hurt

earlstevens58 — Wed, 27 Jul 2011 12:11:59 +0000

Stryker Meets Earnings Estimates but Costs Hurt

July 20, 2011 | SYK | BSX | ZMH | SNN | CNMD | JNJ

Orthopedic devices major Stryker Corporation (SYK - Analyst Report) posted second-quarter fiscal 2011 adjusted earnings per share of 90 cents, meeting the Zacks Consensus Estimate while transcending the year-ago earnings of 80 cents.

Adjusted net income jumped 10.4% year over year to $352 million. The adjusted earnings exclude $43 million in charges associated with the company’s recent buyout of its rival Orthovita and the $1.5 billion acquisition of Boston Scientific’s (BSX - Analyst Report) Neurovascular business.

However, profit (as reported) skid 3.1% to $309 million (or 79 cents a share) on account of the sizable acquisition-related charges. Stryker is on an acquisition binge to spur growth as its faces sustained pricing and procedure volume pressure in its core replacement hips and knees businesses. However, costs associated with such transactions have weighed on its bottom line.

The Kalamazoo, Michigan-based company’s shares fell $1.16 (or 1.96%) to $58 in after-hours trading on July 19, dampened by lower profit. Stryker, however, re-affirmed its fiscal 2011 revenues and adjusted earnings outlook.

Revenue Analysis

Revenues leapt 16.3% year over year to $2,045.5 million, above the Zacks Consensus Estimate of $2,007 million. Sustained double-digit growth at the company’s surgical equipment unit (“MedSurg”) once again catalyzed top line growth, offsetting the lingering challenges in the orthopedic business.

Volume and mix, acquisitions, and favorable foreign currency exchange translation contributed 7.2%, 6.2% and 4.4%, respectively, to the growth, partly neutralized by unfavorable pricing impact. Domestic and international revenues surged 10.7% and 27.3%, respectively, in the quarter.

Results by Segment

Revenues from the company’s Reconstructive unit, offering replacement hip, knees and extremities products, climbed 7.4% year over year to $916 million. However, barring the impact of foreign exchange swings, reconstructive sales grew a mere 1.8% in the quarter. Growth in the hips, trauma and extremities segment was, in part, marred by a somewhat weak knee business.

Domestic and international hip sales rose 11% and 18%, respectively, thanks to the favorable traction of new hip systems, ADM Restoration and MDM X3. Trauma and extremities business had a healthy quarter with sales climbing 11% and 17% in the U.S. and international markets, respectively.

However, Stryker’s knee business remains challenged given a soft market. Domestic knee sales grew 4% (down 1% in constant currency) in the quarter. The recently approved OtisMed pre-op surgical cutting guides are expected to rekindle growth in this business in the second half.

Implant pricing and elective procedure volume still remains headwinds for Stryker. The company stated that its selling prices fell 1.5% globally in the quarter. Moreover, continued patient deferral of elective procedures, impacted by a host of macro issues including high unemployment rate and expiry of health insurance, led to weak demand for hip and knee implants.

Revenues from Stryker’s MedSurg unit spiked 15% (up 11.9% in constant currency) year over year to $773 million, buoyed by strong sales of the company’s bed and stretcher offerings. Acquisitions contributed 1.9% to the growth. The division is benefiting from a recovery in capital spending by hospitals as they replace their worn-out equipment.

Neurotechnology and Spine products sales catapulted 52.6% (up 49% on constant currency basis) year over year to $356 million, boosted by higher shipments of neurotechnology products and the acquisition of the Neurovascular asset. However, the spine implant business continues to be impinged by pricing and volume pressure.

Margin Trends

Gross margin contracted to 65.2% from 69.3% a year-ago. Operating margins declined to 19.6% from 25.5% in the year-ago quarter. Margins were hit by the hefty acquisition-related charges (including inventory step-up and acquisition integration costs). Research, development and engineering expenses as a percentage of sales rose to 5.6% from 5.4% a year ago. Selling, general and administrative expenses (as a percentage of sales) increased to 38.4% from 37.6%.

Financial Condition

Stryker ended the second quarter with cash and cash equivalents and marketable securities of $2,675 million, a year over year decline of roughly 34%, on account of cash spent on the Neurovascular unit and Orthovita acquisitions. Long-term debt remained essentially flat year over year at $996.7 million.

Stryker generated $156 million of cash from operations during the quarter, down 52% year over year, with free cash flows of $106 million. The company did not repurchase any shares in the quarter.

Outlook and Recommendation

Stryker has maintained its forecasted revenue growth of 11%-13% (in constant currency) for fiscal 2011. Excluding foreign exchange translation impact and acquisitions, sales are expected to grow in the band of 5%-7%.

Growth is expected to be fueled by higher shipments of Reconstructive, MedSurg, and Neurotechnology and Spine products coupled with acquisitions. The company envisions foreign currency (assuming current exchange rates) to favorably impact sales by roughly 2.5%-3.5% in third-quarter 2011 and 2%-3% in fiscal 2011.

Adjusted earnings target for fiscal 2011 remains in the range of $3.65 to $3.73 per share, a 10%-12% year over year growth. The company now expects charges associated with acquisitions to trim its 2011 earnings per share by roughly 33-35 cents versus its earlier forecast of 28-30 cents. The current Zacks Consensus Estimate for fiscal 2011 is $3.71.

We believe that Stryker remains well placed for growth driven by new products, acquisitions and a stable-to-improving hospital capital spending environment. However, it contends in a soft and highly competitive orthopedic industry and faces tough challenges from its peers such as Zimmer Holdings (ZMH - Analyst Report), Johnson & Johnson’s (JNJ - Analyst Report) DePuy, Smith & Nephew(SNN - Snapshot Report), CONMED Corp (CNMD - Analyst Report) and privately-held Biomet.

Moreover, the company still remains exposed to pricing/volume pressure on its hip, knee and spine products. We are currently Neutral on Stryker, which is in line with a short-term Zacks #3 Rank (Hold).

New Stryker Hip Replacement System looks Good (earlsview.com)
Orthopedic industry struggles won’t defeat Stryker, CEO says (medcitynews.com)
Stryker sales drop 3 percent, shares follow (medcitynews.com)
Stryker will buy competitor Orthovita for $304M (seattletimes.nwsource.com)

Filed under: Hip Replacement, Stryker, Stryker profits Tagged: Boston Scientific, Business, Hip Replacement, Johnson & Johnson, Kalamazoo Michigan, Orthopedic surgery, OtisMed, Stryker Corporation, surgery, Zimmer Holdings

Stryker Profit for the quarter slipped 3.1%

earlstevens58 — Wed, 27 Jul 2011 11:55:25 +0000

Earnings Scorecard: Stryker

By: Zacks Equity Research

July 26, 2011

Orthopedic devices giant Stryker Corporation (SYK – Analyst Report) reported second-quarter fiscal 2011 adjusted (excluding acquisition-related charges) earnings per share of 90 cents, matching the Zacks Consensus Estimate.

Second Quarter Flashback

Profit (as reported) for the quarter slipped 3.1% on account of $43 million in charges associated company’s acquisition of Orthovita andBoston Scientific’s (BSX - Analyst Report) neurovascular business. Revenues spurted roughly 16% year over year to $2,045.5 million, ahead of the Zacks Consensus Estimate of $2,007 million, backed by foreign exchange tailwind.

Sustained double-digit growth at the company’s surgical equipment unit (MedSurg) catalyzed revenue growth, masking the lingering challenges in the orthopedic business. Revenues from the Reconstructive division rose 7.4% in the quarter. However, barring foreign exchange translation, sales increased just 1.8%. Growth in the hips, trauma and extremities franchises was, in part, neutralized by a weak knee business.

MedSurg revenues climbed 15% in the quarter, boosted by strong sales of the company’s bed and stretcher offerings as well as acquisitions. Revenues from the new Neurotechnology and Spine unit skyrocketed roughly 53% in the quarter. Stryker re-affirmed its fiscal 2011 revenues and adjusted earnings outlook.

We have discussed the quarterly results at length here: Stryker Meets but Costs Hurt.

Agreement – Estimate Revisions

Estimates for fiscal 2011 indicate a somewhat mixed analyst reaction to the second quarter results. Out of 29 analysts covering the stock, 8 have raised their estimates over the past week with 9 moving in the opposite direction. Estimates are edged towards the positive side over the past month with 10 analysts having lifted their forecasts while 8 making negative revisions.

For fiscal 2012, estimates are positively inclined with 11 analysts (out of 29) making upward revisions over the last 7 days while 6 chopping their forecasts. Over the past 30 days, 12 analysts have hiked their estimates accompanied by 6 reverse movements.

Sustained strong momentum at MedSurg (backed by a recovery in hospital capital spending) and visibility for improved growth in the second half through new product launches inspires optimism among the analysts. On the flip side, weakness in the knee business, acquisition-related dilution, and continued pricing/volume pressure on Stryker’s implant products, which mirror a general trend in the industry, contributed to the bearish moves.

Magnitude – Consensus Estimate Trend

The magnitude of revisions for fiscal 2011 has plateaued over the last week. However, there has been an increase of a penny in the estimate for fiscal 2012 over the past 7 days, given the positive directional agreement. The current Zacks Consensus Estimates for 2011 and 2012 are $3.71 and $4.12, respectively.

Our Take

Stryker, one of largest medical devices makers on the planet, continues to perform reasonably well in a challenging operating environment leveraging a well diversified product portfolio. We believe that the company is poised for growth riding on new products, acquisitions and an improving hospital capital spending environment.

New products including the hip systems, ADM Restoration and MDM X3 (Modular Dual Mobility), are expected to favorably impact Stryker’s fiscal 2011 results. The ongoing transition from metal-on-metal (MoM) hip implants to next-generation hip systems represents a tailwind for the company. Given its less MoM exposure, Stryker is well positioned to gain hip market share vis-à-vis its highly exposed counterparts such as Johnson and Johnson’s (JNJ - Analyst Report) DePuy, Wright Medical (WMGI - Analyst Report) and privately-held Biomet.

Although Stryker’s knee franchise is still struggling, the recently approved OtisMed pre-op surgical cutting guides are expected to rekindle growth in this business in second-half 2011.

Stryker is actively pursuing acquisitions recently pressed by sustained pricing and procedure volume pressure in its core replacement hips and knees businesses. The $1.5 billion acquisition of Boston Scientific’s neurovascular assets has enabled the company to diversify its portfolio. Moreover, the acquisitions of rival Orthovita and Memometal Technologies have reinforced Stryker’s position in key market segments.

Stryker remains committed to deliver incremental returns to investors leveraging a solid balance sheet, healthy free cash flow and earnings power. Management’s outlook for fiscal 2011 remains favorable with revenues expected to grow at a double-digit clip in constant currency.

However, Stryker contends in a highly competitive orthopedic industry. Moreover, implant pricing and elective procedure volume still remain headwinds for the company. Stryker stated that its selling prices fell 1.5% globally in the second quarter.

Moreover, sustained patient deferral of elective procedures, impacted by a host of macro issues including high unemployment rate and expiry of health insurance, has led to weak demand for hip and knee implants. As such, a soft reconstructive implant market may weigh on the company’s results. We also account for the dilutive impact of acquisition-related charges. Our long-term Neutral recommendation on the stock is in agreement with a short-term Zacks #3 Rank (Hold).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings athttp://www.zacks.com/education/.

Stryker net profit slips 3% (marketwatch.com)
Stryker will buy competitor Orthovita for $304M (seattletimes.nwsource.com)
Stryker sales drop 3 percent, shares follow (medcitynews.com)
UPDATE 2-Stryker profit in line, but ortho sales weak (reuters.com)
Is Stryker the Right Stock to Retire With? (fool.com)
Roundtable: Best Dividends in Health Care (dailyfinance.com)
5-Star Stocks Poised to Pop: Stryker (fool.com)
Orthopaedics: Market Prospects & Global Competition Share (earlsview.com)
Orthopedic industry struggles won’t defeat Stryker, CEO says (medcitynews.com)
Stryker Spine faces two new lawsuits (medcitynews.com)
Stryker orthopedics division head moves to DJO Global (medcitynews.com)
Stryker cuts ties with Corin Group amid two new distribution deals (medcitynews.com)

Filed under: Stryker, Stryker Hip Implant Recall, Stryker profits, Stryker Trident Hip Replacement System Tagged: Biomet, Boston Scientific, Business, DePuy, Johnson & Johnson, Neurotechnology, Orthopedic surgery, OtisMed, Stryker Corporation

Earl's View » Stryker profits

Stryker Meets Earnings Estimates but Costs Hurt

Stryker Meets Earnings Estimates but Costs Hurt

Revenue Analysis

Results by Segment

Margin Trends

Financial Condition

Outlook and Recommendation

Related articles

Stryker Profit for the quarter slipped 3.1%

Earnings Scorecard: Stryker

Second Quarter Flashback

Agreement – Estimate Revisions

Magnitude – Consensus Estimate Trend

Our Take

About Earnings Estimate Scorecard

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