Medical devices giant Stryker Corp. (SYK) is slated to release its second-quarter 2010 results on Tuesday, July 20, 2010. The company has not divulged any financial forecast for the quarter. However, in its first-quarter conference call, Stryker stated that it envisages foreign currency exchange to favorably impact second quarter net sales by 1% to 2%. The company has reaffirmed its earnings estimate for 2010, which is expected to range between $3.20 and $3.30.
 
The current Zacks Consensus Estimate for the first-quarter is 80 cents, representing a 9.54% annualized growth. With respect to earnings surprise, Stryker has posted two positive surprises in the preceding four quarters while it met the Zacks Consensus Estimate on two other occasions. Based on this trend, we expect the company to meet or beat expectation in the upcoming quarter.
  
First-Quarter Flashback
 
Stryker reported first-quarter earnings per share of 80 cents surpassing the Zacks Consensus Estimate of 78 cents and the year-ago earnings of 71 cents.  The better-than-expected results were fuelled by contribution from the company’s acquisition of Ascent Healthcare Solutions and strong demand for its Orthopedic Implants and MedSurg Equipment product lines.
 
The company reported an annualized growth in revenues of 12.4%, boosted by growth across all business segments and favorable foreign currency exchange swings. Orthopedic Implants sales leapt 10.7% year over year led by strong demand for the company’s hips, knees, trauma and spine products.
 
MedSurg Equipment sales surged 15% year over year on the back of higher sales from surgical equipment and surgical navigation systems, endoscopic and communications systems, and patient handling and emergency medical equipments. Stryker’s cost-control initiatives helped increase operating and net margins in the quarter.
  
Estimate Revisions Trend
 
Estimates for the second quarter have inclined towards the negative side over the past week and month, manifesting a potential for some downward pressure on the stock. Out of 26 analysts covering the stock, 2 analysts have chopped earnings estimates while none have moved in the opposite direction.
 
Estimates for 2010 are mixed and lack any directional agreement over the last 30 days, with 1 out of 29 analysts lifting his/her forecast while 1 making a negative revision. There have been one downward revision over the past week and no reverse movements.
 
The bearish sentiment for the upcoming quarter reflects the macro concerns surrounding Stryker’s European markets, emanating from the truncated capital spending by hospitals and translation risks arising from the foreign exchange headwind. A soft European spending backdrop has been challenging for Stryker which is a major supplier of orthopedic implants in hospitals.
  
Magnitude
 
The magnitude of revisions for the forthcoming quarter has plateaued over the last 7, 30 and 60 days. Estimates for 2010 have gone down by a penny over the past week while remaining static over the last month. The Zacks Consensus Estimate for 2010 is currently $3.27, reflecting a year-over-year growth of 10.87%.   
  
Stryker in “Neutral” Zone
 
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 Wright Medical (WMGI). Moreover, the company is experiencing price pressure on its hip, knee and spine products. Another area of concern is the challenging hospital spending environment, which may affect Stryker’s MedSurg division.
 
Stryker is poised for growth across its Orthopedic and MedSurg divisions driven by new product launches and acquisitions. The company should benefit from the resurgent replacement hips and knees markets, which rebounded in the first quarter from a slowdown in the recession.
 
However, we feel that competition-driven pricing pressure on implant products, a tight capital spending environment and sluggish European markets could potentially dent future earnings. This is reflected in our Neutral recommendation for the stock, which is supported by a Zacks #3 Rank (Hold).
 
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 “WMGI”
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