Orthopedic devices major Stryker (SYK) has pre-announced its fourth quarter and full year 2011 sales, lifted the lower end of its earnings view for 2011 and initiated its outlook for the new year. The company is slated to release final results for the quarter and fiscal after the closing gong on January 24.
Ortho Struggles, Growth Is Elsewhere
The Michigan-based company said that its revenues for the fourth quarter spurted 11% (10.7% on a constant currency basis) year over year to $2.2 billion, essentially in line with the Zacks Consensus Estimate. For the full year, sales leapt 13.5% (11.1% in constant currency) to $8.3 billion, also matching the Zacks Consensus Estimate. The constant currency sales growth dovetailed the company’s guidance of 11%-12%.
Per the preliminary results, revenues from Stryker’s core Reconstructive unit, offering replacement hip, knees and extremities products, crept up 0.7% and 1.5% in constant currency in the fourth quarter and fiscal 2011, respectively. Fourth quarter results shows a deceleration from a 3.9% growth achieved in the previous quarter, which points to a weak reconstructive market fundamentals.
The MedSurg business continues its healthy run with revenues surging 11.1% (11.2% for the fiscal). Neurotechnology and Spine sales ballooned 46.8% (46.4% for the fiscal) in the quarter.
Beefs up 2011 View
Stryker has raised the bottom end of its adjusted earnings guidance for fiscal 2011 which is now expected to range between $3.72 and $3.74 a share vis-?-vis $3.70 and $3.74, earlier. The revised guidance represents a 12% annualized growth. Analysts polled by Zacks currently expect earnings of $3.73 a share on average.
Stryker expects charges associated with acquisition and integration to dilute its 2011 earnings per share by roughly 37 cents. The company expects to record a charge of roughly $76 million ($60 million net of tax) in the fourth quarter in connection with its previously communicated headcount reduction and other restructuring moves.
Moreover, Stryker noted that it expects to register a benefit of roughly $99 million (after tax) or 26 cents a share in the quarter, stemming from a favorable settlement with the U.S. Internal Revenue Service.
Unfolds 2012 Outlook
Stryker has divulged its outlook for fiscal 2012 with revenues expected to grow 3.5%-6.5% in constant currency. The company expects foreign currency (assuming current exchange rates) to favorably or unfavorably impact sales by roughly 0.5% in first-quarter 2012 and negatively impact full year sales by roughly 0.5%-1.5%.
Barring the foreign currency and acquisition impact, sales have been forecast to grow by 2%-5%. The organic growth outlook appears to indicate sustained pressure in the core orthopedic business.
The company expects adjusted earnings to grow at a double-digit clip over for fiscal 2011. Stryker expects earnings of $3.88 a share and adjusted earnings of $4.10 a share for fiscal 2012. The projection is just shy of the current Zacks Consensus Estimate of $4.11. The company sees charges associated with acquisition/integration and restructuring to trim 2012 earnings per share by roughly 22 cents.
Stryker’s shares rose 46 cents (or 0.89%) in regular trading to close at $52.26 on Tuesday and gained 50 cents (or 0.96%) in after-hours trading.
Neutral on Stryker
We believe that Stryker is poised for growth powered by new products, acquisitions and recovery in capital spending by hospitals. The company is expanding its product portfolio by acquiring complementary businesses leveraging a solid balance sheet. Stryker was involved in a series of acquisitions last year pressed by sustained pricing and procedure volume pressure in its core replacement hips and knees businesses.
Moreover, Stryker remains committed to deliver incremental returns to investors leveraging a solid balance sheet, healthy free cash flow and earnings power. The company repurchased 1.8 million shares in the fourth quarter, bringing the total repurchases to 11.8 million (worth $622 million) for fiscal 2011. Moreover, Stryker, in December 2011, beefed up its quarterly dividend by 18% to 21.25 cents and its Board approved an additional $500 million share repurchase program.
In an effort to boost productivity and neutralize costs associated with the implementation of the new government-mandated Medical Device Excise Tax (scheduled in 2013), Stryker unveiled its plans, in November 2011, to snip headcount and execute other restructuring activities. The company expects the move to shave annual pre-tax operating costs by more than $100 million starting 2013.
However, Stryker operates in a highly competitive orthopedic industry and faces strong competition from players like Zimmer (ZMH), Johnson & Johnson‘s (JNJ) DePuy and Smith & Nephew (SNN). Moreover, it remains challenged by the sustained lumpiness in the reconstructive implant market and pricing and elective procedure volume still remains headwinds
The general softness in the orthopedic market remains a key concern. We are currently Neutral on Stryker, backed by a short-term Zacks #3 Rank (Hold).
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