Second Quarter Revisited
Medical devices giant Stryker Corp. (SYK) produced a mixed bag in the second quarter, matching earnings expectations while missing on the revenue front. Earnings of 80 cents per share came in line with the Zacks Consensus Estimate and net income leapt 9.5% year-over-year, led by healthy growth at the MedSurg Equipment division.
Revenues grew 7.6% year-over-year to $1,758 million, but trailed the Zacks Consensus Estimate of $1,767 million as higher sales from MedSurg were marred by a sluggish Orthopedic business. International revenue growth was muted by lower Orthopedic Implants shipments, discontinued product lines, termination of distributor contracts. Lower-than-expected sales hit Stryker’s shares which slipped $1.79 (or 3.49%) in after-market trading on July 20.
We have discussed the quarterly results at length here.
Agreement of Analysts
The overall trend in estimate revisions for fiscal 2010 is inclined towards the negative side following the second quarter results. Out of 27 analysts covering the stock, 10 have chopped their estimates over the past week while 5 have made positive revisions. Likewise, 11 analysts (out of 28) have trimmed their forecasts for fiscal 2011 over the same period, with 4 raising their estimates. A similar trend is observed for annual estimates over the past month.
The bearish sentiment has been fueled by the lower-than-expected Orthopedic results in the second quarter, attributable to deceleration across the board as evidenced by weak hips, knees and spinal devices sales. Moreover, product pricing pressure on Stryker’s implant products, which mirrors a general trend in the industry, also contributed to the gloomy opinion. Conversely, sustained double-digit growth at MedSurg coupled with improving margin trends is a factor which inspires bullishness in some analysts.
The downswing in estimate revisions, which indicates weak performances moving forward, not only exert a meaningful impact on the Zacks Rank but also reflect the potential for significant downward pressure on the stock.
Magnitude of Estimate Revisions
Downward estimate revisions accompanied by a directional agreement have led to a decline in annual forecasts for Stryker. Estimates for fiscal 2010 and 2011 have gone down by a penny over the past week. The current Zacks Consensus Estimate for fiscal 2010 is $3.26, reflecting a 10.62% year-over-year growth.
Remaining Neutral on Stryker
Stryker is one of the world’s largest medical devices companies operating in the global orthopedic space. The company’s well diversified product portfolio is a natural hedge against the risk of revenue shortfall in a volatile economy.
Stryker continues to expand its product range by acquiring complementary products or businesses. As a part of this initiative, the company acquired medical devices maker Ascent Healthcare in fourth-quarter 2009, providing a major boost to its MedSurg Equipment segment.
However, the Orthopedic industry is highly competitive and Stryker faces stiff challenges from it peers such as Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp (CNMD), Biomet and DePuy, a division of Johnson & Johnson (JNJ). Stryker’s spinal implants products, in particular, are facing the heat in a market where rival offerings continue to make in-roads, hurting the company’s market share. The spinal business is expected to remain challenged for the remainder of fiscal 2010.
Moving forward, we feel that Stryker should benefit from the resurgent replacement hips and knees markets, which have rebounded from a slowdown in the height of the recession. Also, new product launches and acquisitions should catalyze growth across Orthopedic and MedSurg divisions.
While acknowledging the strength at MedSurg, we point out some areas of concerns such as pricing pressure and stiff competition in the orthopedic space, sluggish European markets, and a challenging hospital capital spending environment, which could potentially dent future earnings. As such, we remain in the Neutral territory, which is supported by the 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 at http://www.zacks.com/education/.
Read the full analyst report on “SYK”
Read the full analyst report on “ZMH”
Read the full analyst report on “SNN”
Read the full analyst report on “CNMD”
Read the full analyst report on “JNJ”
Zacks Investment Research
