Orthopedic devices major, Stryker Corp. (SYK) has pre-announced its fourth-quarter and full year 2012 results and provided its outlook for 2013. The company will report its financial results on Jan 23, after market closes.
Sales Growth Exceeds Guidance
According to the Michigan-based company, revenues for the fourth quarter increased 5.5% (6.1% on a constant currency basis and excluding acquisitions) year over year to $2.3 billion, essentially in line with the Zacks Consensus Estimate. For the full year, revenues grew 4.2% (4.2% in constant currency and excluding acquisitions) to $8.7 billion, also matching the Zacks Consensus Estimate. The constant currency 2012 revenue growth surpassed the company’s guidance of 2.5%–4.0%.
As per the preliminary results, revenues from Stryker’s core Reconstructive unit, offering replacement hip, knees and extremities products, rose 7.4% and 4.4% in constant currency in the fourth quarter and full year 2012, respectively. The fourth-quarter results show improvement from 1.1% constant currency revenue growth achieved in the previous quarter, which points to an improving reconstructive market fundamentals.
The MedSurg business continues its healthy run with revenues growing 2.7% and 4.2% in constant currency in the fourth quarter and full year 2012, respectively. Neurotechnology and Spine revenues jumped 10.8% and 10.5% in constant currency in the fourth quarter and full year 2012, respectively.
Stryker did not repurchase any shares in the fourth quarter, and ended 2012 with a total repurchase of 2.1 million shares worth $108 million.
2012 Outlook Upgraded
Stryker has raised the bottom end of its adjusted earnings guidance for full year 2012 to between $4.05 and $4.07 a share from $4.04–$4.07, earlier. The revised guidance represents 8.9%–9.4% annualized growth. The current Zacks Consensus Estimate for 2012 earnings is $4.06 a share.
However, management announced that the Rejuvenate and ABG II hip products recall in June 2012 has resulted in a fourth-quarter charge of $174 million before taxes ($133 million net of taxes) or 35 cents per share. However, this is regarded as a one-time expense by the company and is excluded from the adjusted earnings per share. Stryker expects total expenses of $190 million to $390 million for patient testing and treatment, lawsuits and insurance payments related to the product recall.
Stryker expects charges associated with the acquisition and integration to dilute its 2012 earnings per share by roughly 9 cents. The company expects to record a charge of roughly 15 cents in connection with its restructuring moves in 2012. Further, an issue involving the U.S. Department of Justice and related to the sales and marketing of OtisKnee has resulted in a non-tax deductible charge of 9 cents per share in the year.
2013 Outlook
Stryker has divulged its outlook for 2013. Revenues are expected to grow 3.0%–5.5% in constant currency. The company expects foreign currency (assuming current exchange rates) to unfavorably impact sales by roughly flat to 1% in the first quarter as well as full year 2013.
After accounting for the $100 million pre-tax annualized impact from the Med-Tech excise tax, Stryker expects adjusted earnings in the range of $4.25—$4.40 a share for 2013. The current Zacks Consensus Estimate of $4.32 for the year is within the provided guidance.
Further, the company highlighted certain factors, which are expected to affect both the top as well as bottom-line growth in 2013. Fewer selling days in the first quarter compared with the year-ago quarter, price reductions in Japan in April 2012, the Neptune product recall and the income tax adjustments in 2012 are expected to impact results in 2013. Based on the above mentioned factors, adjusted earnings are expected to grow 23%, 24%, 24% and 29% in each of the four quarters of 2013, respectively.
Neutral on Stryker
Stryker carries a short-term Zacks Rank #3 (Hold) and consequently we have a Neutral recommendation on the stock. The company, with a market-cap of $22.4 billion, is one of the world’s largest medical device manufacturers operating in the global orthopedic market.
The company’s well-diversified product portfolio along with acquisitions are expected to drive future growth. Moreover, the company remains committed to delivering incremental returns to investors, reflected in the recent 25% hike in dividends and the $1 billion worth of share repurchase program.
However, Stryker faces several challenges, which include continued soft international sales and tough hospital capital budgets. Moreover, despite the recent stability in the domestic market, it remains challenged by currency fluctuations and pricing pressure. Additionally, Stryker operates in the highly competitive orthopedic industry and faces strong competition from players like Zimmer Holdings Inc. (ZMH).
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