Stryker Corporation SYK recently announced a definitive agreement to acquire K2M Group Holdings, Inc. KTWO for $1.4 billion in cash. The transaction is expected to close by the fourth quarter of 2018.
Per management, the acquisition will strengthen the company’s position in the spine and related neurotechnology market. In the second quarter, sales in the Neurotechnology & Spine segment grossed $639 million, improving 18.5% at cc.
Spine Division Gets a Boost
Post the acquisition, Stryker will leverage on K2M Group’s complex spine and minimally invasive solutions. For investors’ notice, K2M Group witnessed double-digit CAGR in the past five years, courtesy of impressive product portfolio and sales force focus.
Not to forget, Stryker has been already grappling with certain issues in the spine segment. In second-quarter 2018 results, international growth in the segment was partially offset by supply headwinds. The segment also witnessed mid-single-digit pricing declines, in spite of decent performance by the Tritanium implant products.
Considering these headwinds, we believe that the latest development is appropriate for Stryker.
What is Moody’s Opinion?
Per Moody's Investors Service, Stryker's decision to acquire K2M Group is credit negative. The acquisition might result in an increase in financial leverage.
However, Moody’s stated that there will be no impact to Stryker's Baa1 senior unsecured rating, Prime-2 short term rating and the stable rating outlook.
Stryker Retains Guidance
Stryker anticipates no material impact of this acquisition on full-year earnings. The company expects adjusted earnings per share between $7.22 and $7.27.
That’s not all.
Management also reaffirmed its previously stated long-term financial goals for 2019 and beyond.
Which Way are the Estimates Treading?
For 2018, the Zacks Consensus Estimate for earnings is pegged at $7.25, indicating a rise of 11.7% year over year. The same for revenues is pegged at $13.5 billion, reflecting growth of 8.8% on a year-over-year basis.
The stock has a Zacks Rank #3 (Hold).
Stryker Corporation Price and Consensus
Price Performance
Stryker underperformed its industry in a year's time. The company’s shares have returned almost 19.5% compared with the industry's rise of 21.2%.
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Want More from the MedTech Space?
A few better-ranked stocks in the MedTech space are Penumbra, Inc PEN and Illumina, Inc ILMN. The stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Penumbra has a long-term expected earnings growth rate of 20%, while the same for Illuminais pinned at 22.1%.
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