Stryker Corporation (SYK) is slated to report third-quarter 2014 results after the closing bell on Oct 16. In the last reported quarter, Stryker recorded a negative earnings surprise of 0.92%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Stryker has lately been following an acquisition-driven strategy to boost its organic growth profile. The company has cut several small and targeted deals in the recent past to diversify its offerings and acquire a larger share of the market, countering competition from bigger players in the medical devices industry.
Along with intensifying competition, Stryker has to combat challenging macroeconomic conditions, particularly the 2.3% medical device excise tax. The recent fiscal tightening and tapering of reimbursements are added concerns.
A couple of recent M&A activities pose a threat to Stryker. They include the merger announcements between Medtronic and Covidien, and between Zimmer Holdings and privately-owned Biomet, all of which happen to be Stryker’s close competitors. Additionally, Stryker’s long-term debt, standing at $3,237 million as of Jun 30, 2014, puts significant interest burden on the company.
Despite a multitude of impediments, Stryker has attained a competitive edge in the hip-and-knee replacement market and gained access to certain key surgical assets, particularly the STAR Ankle System, through its aggressive acquisition strategy. Even as the company executes these acquisitions, it has remarkably maintained a positive free cash flow of $448 million in the last quarter.
Earnings Whispers
The soon-to-be-reported quarter has witnessed one downward estimate revision in the last 7 days without any upward revision. However, the Zacks Consensus Estimate for the quarter has remained unchanged over this time frame. For the current year, three estimates moved south over the last one week, shrinking the Zacks Consensus Estimate by 0.2% to $4.76.
Furthermore, our proven model does not conclusively show that Stryker is likely to beat earnings this quarter as it does not have the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at -0.88%. This is because the Most Accurate estimate of $1.13 is below the Zacks Consensus Estimate of $1.14.
Zacks Rank: Stryker currently holds a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks That Warrant a Look
Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat:
Edwards Lifesciences Corp. (EW) with an earnings ESP of 1.41% and a Zacks Rank #2 (Buy).
Hologic Inc. (HOLX) with an earnings ESP of 5.41% and a Zacks Rank #3 (Hold).
Heartware International Inc. (HTWR) with an earnings ESP of 21.21% and a Zacks Rank #3 (Hold).
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