Stryker Corp SYK reported adjusted earnings of $1.25 per share in third-quarter 2015, which beat the Zacks Consensus Estimate by a couple of cents and increased 8.7% from the year-ago quarter. The year-over-year improvement was driven by higher sales and improved margins.
Net sales increased 1.3% to $2.42 billion, which fell short of the Zacks Consensus Estimate of $2.45 billion. At constant currency (cc), net sales improved 5.9% from the year-ago quarter. Organic growth was nearly 5.3% in the third quarter, driven by improving volume and partially offset by pricing headwinds. Acquisitions added a mere 0.6%, while a strong U.S. dollar adversely impacted overall sales by 4.6% in the quarter.
Segment Details
U.S. sales were up 7.8% year over year to $1.76 billion, driven by growth across all segments. Orthopedic, MedSurg, and Neurotechnology & Spine grew 9%, 5.3% and 11.4%, respectively.
International sales fell 12.6% (up 1.8% at constant currency) on a year-over-year basis to $664 million. International sales of Orthopedic, MedSurg, and Neurotechnology & Spine inched up 0.5%, 0.4% and 7.2%, respectively. Geographically, strong growth in Europe and Australia were partially offset by weakness in the Chinese and Latin American businesses.
Orthopedic sales increased 0.3% (up 5.8% at constant currency) to $1.02 billion, driven by growth of 9.1% in Trauma & Extremities sales and 16.7% in other sales. Hips and Knees sales increased 3.1% and 3.5%, respectively. Growth in Trauma & Extremities reflected a strong double-digit organic growth for U.S. foot and ankle business.
MedSurg sales increased 0.6% (up 4.1% at constant currency) year over year to $943 million. Endoscopy, Instruments and Medical sales improved 1.4%, 6.6% and 5.7%, respectively.
Neurotechnology and Spine segment sales climbed 5% (up 9.9% at constant currency) to $458 million, primarily owing to a 15.9% surge in Neurotechnology sales, which include neurovascular, CMF and NSE. Spine sales increased 1.9% on a year-over-year basis in the reported quarter.
Margins & Costs
Adjusted gross margin expanded 120 basis points (bps) to 66.9%, primarily driven by favorable mix and operational efficiency.
Research and development (R&D) expenses, as a percentage of sales, remained unchanged at 6.4%. On the other hand, adjusted selling, general and administrative (SG&A) expenses increased 30 bps, primarily due to investments in selling and marketing activities, and in support of its new regional headquarters in Europe.
Adjusted operating margin expanded 100 bps to 24.9% on a year-over-year basis, on the back of improving gross margins, partially offset by prevailing pricing headwinds.
Liquidity
Stryker exited the third quarter with cash and cash equivalents of $3.16 billion and long-term debt (excluding current maturities) of $2.51 billion. The company repurchased shares worth $446 million in the first nine months of 2015. The company now has about $2 billion available for further share repurchases.
Outlook
The company continues to expect sales growth of 6.5% to 7.5% at constant currency. Organic growth is forecasted in the range of 5.5% to 6.5%. Unfavorable foreign exchange is expected to hurt sales by about 4%, given the adverse foreign exchange rate at present. The company believes that pricing pressure will continue and hurt prices by about 1.5%–2% going forward.
Stryker increased the lower range of its earnings guidance for 2015. Adjusted earnings are now expected in the range of $5.07–$5.12, as compared to the previous range of $5.06–$5.12 per share, taking into account an unfavorable foreign exchange impact of 25 cents for full-year 2015.
Our Take
We believe that strong growth momentum at the Trauma & Extremities, Spine and Neurotechnology businesses will drive top-line growth over the remainder of 2015.
We also believe Stryker’s innovative product pipeline will be a key growth catalyst. Growing adoption of MAKO will drive sales in the orthopedic and reconstructive surgery market. Additionally, contract wins from large hospitals in the foot and ankle business present significant growth opportunity.
However, a strong U.S. dollar and pricing pressure will continue to hurt sales in the near term.
Zacks Rank and Key Picks
Currently, Stryker carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical sector are Masimo MASI, Natus Medical BABY and NuVasive NUVA. All the stocks sport a Zacks Rank #1 (Strong Buy).
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