Orthopedic devices major Stryker Corporation (SYK) reported first-quarter fiscal 2011 adjusted (excluding one-time acquisition-related charges) earnings per share of 90 cents, beating the Zacks Consensus Estimate by a penny.
The Quarter Revisited
Profit (as reported) for the quarter slid 4.4% on account of a hefty charge associated with the company’s acquisition of Boston Scientific’s (BSX) neurovascular business. Revenues surged 12% year over year to $2.02 billion, ahead of the Zacks Consensus Estimate of $2 billion.
Sales were boosted by sustained double-digit growth at the company’s surgical equipment unit (MedSurg) coupled with the acquisition of the neurovascular business, which offset the lingering softness in its reconstructive business.
Revenues from the reconstructive business edged up 1.9% in the quarter. Stryker’s hips and trauma businesses posted growth in the quarter, partly offset by lower knee sales which were affected by a soft market.
Stryker backed its full-year fiscal 2011 sales and adjusted earnings guidance. Despite the better-than-expected results, the Michigan-based company’s shares fell $1.10 (or 1.80%) to $60 in after-hours trading on April 19, reflecting the lower reported profit.
We have discussed the quarterly results at length here: Stryker Beats but Charges Hit Net
Agreement – Estimate Revisions
Estimates for fiscal 2011 demonstrate a relative lack of activity over the last week. Out of 30 analysts covering the stock, 1 has lowered his/her estimate with no reverse movements. However, over the past month, estimates manifest some directional consensus with 10 analysts (out of 30) having lifted their forecasts while 5 moved in the opposite direction.
For fiscal 2012, just 1 analyst (out of 30) made an upward revision over the last 7 days with none lowering their forecasts. Over the past 30 days, 9 analysts have hiked their estimates accompanied by 5 negative revisions. On an average, the trend reflects a somewhat mixed reaction to the first quarter results.
Continued strong growth momentum at MedSurg, management’s favorable outlook and strength in new product launches inspire optimism among the analysts. On the flip side, a soft reconstructive implant market coupled with sustained volume and pricing headwinds has prompted some analysts to take a bearish stance.
Magnitude – Consensus Estimate Trend
Given the lack of estimate revisions and directional pressure, the magnitude of revisions for fiscal 2011 has been stationary over the last week. Moreover, despite a number of revisions, estimate for fiscal 2011 has remained static (at $3.71) over the past 30 days.
However, there has been an increase of a penny, for fiscal 2012, over the last month. The current Zacks Consensus Estimate for 2012 is $4.11, representing an estimated 10.74% year-over-year growth.
Stryker in Neutral Zone
Stryker is armed with a well diversified product portfolio that continue to perform well in a challenging operating environment. We believe that the company is poised for growth driven by new product launches, acquisitions and an improving hospital capital spending backdrop.
The MedSurg division continues to grow at a healthy double-digit clip, benefiting from the synergies of the Ascent Healthcare acquisition. Moreover, new products including the hip systems, Restoration ADM and MDM X3, are expected to favorably impact results in fiscal 2011.
The ongoing transition from metal-on-metal (MoM) hip implants to next-generation hip systems represents a tailwind for Stryker. Although the company’s knee business has been struggling, the U.S. approval (expected in 2011) of OtisMed pre-op surgical cutting guides should offer a rebound in knee demand.
Stryker is expanding its product portfolio by acquiring complementary businesses. The $1.5 billion acquisition of Boston Scientific’s neurovascular assets has provided the company a leeway to diversify into fast-growing therapy markets.
The acquisition provided Stryker the next-generation Target detachable coils for occluding blood flow in vascular abnormalities. The neurovascular business performed strongly in the most recent quarter and should help Stryker in expanding its top line moving forward.
Moreover, with the divestiture of its OP-1 bone growth product franchise, Stryker is redirecting a part of the related R&D spending to other internal projects, which have the potential to deliver better returns, representing a positive step.
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 rate in constant currency.
However, Stryker faces stiff challenges from Zimmer Holdings (ZMH), Smith & Nephew (SNN), CONMED Corp (CNMD), Biomet and Johnson and Johnson’s (JNJ) DePuy in a highly competitive orthopedic industry.
Moreover, the company remains exposed to pricing and procedure volume pressure on its hip, knee and spine products. The joint replacement market has been hit by patient deferral of elective procedures, impacted by a host of macro issues including high unemployment rate and expiry of health insurance.
Recent trends indicate that procedure volume growth across hip and knee markets remains sluggish and a material turnaround is not likely at least in the near term. Moreover, company-wide selling prices dipped 2% globally in the first quarter. The soft reconstructive implant market represents a headwind for Stryker. Our long-term Neutral recommendation on the stock is backed by a short-term Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
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