Maintaining the streak of positive earnings surprises, Stryker Corporation SYK reported fourth-quarter 2017 adjusted earnings per share of $1.96, beating the Zacks Consensus Estimate by a penny. Revenues of $3.47 billion outpaced the Zacks Consensus Estimate of $3.44 billion. Notably, revenues improved 9.9% year over year. Adjusted earnings per share increased 10.1% from the year-ago quarter.
The upside can primarily be attributed to organic sales growth of 8.1% in the reported quarter. Organic growth in the United States was 8.6% on a year-over-year basis, while the same for OUS was 6.7%.
Per management, fourth-quarter results were driven by research and development innovations as well as stellar performance by the company’s Mako Total Knee Applications.
Over the last year, Stryker had a favorable run on the bourses. The stock has returned 36.3% compared with the industry’s rally of 24.%.
Segment Details
Orthopaedic: Revenues in the segment totaled $1.3 billion, up 6.8% year over year at constant currency (cc). In 2017, revenues increased 6.5% at cc to $4.71 billion.
The segment delivered organic growth of 6.8% at cc, courtesy of strong performance in the United States. Notably, the region witnessed organic growth of 8.1% in the quarter. Such gains indicate robust demand for the company’s 3-D printed products, Foot and Ankle portfolio and Mako platform.
MedSurg: Sales at the segment totaled $1.58 billion, up 9.8% on a year-over-year basis at cc. In 2017, revenues increased 13.4% at cc to $5.56 billion.
Internationally, MedSurg reported constant currency growth of 6.7% and organic sales growth of 5.7%, which indicate strong performances in Europe and Australia.
Neurotechnology and Spine: The segment delivered sales worth $586 million, up 10.3% year over year at cc. In 2017, revenues improved 8.3% at cc to $2.2 billion.
Neurotechnology and Spine witnessed 10.3% growth at cc and organic growth of 10% on a year-over-year basis. This shows strong demand for products like Target coil, AIS and CMF among the company’s neuropowered instruments.
Further, Spine business in the United States also posted positive numbers bolstered by high demand for IVS and 3-D printed interbody Tritanium products.
Quarter Highlights
Mako Momentum Continues: In the fourth quarter, the Mako Total Knee platform drove Stryker’s earnings. Mako robot installations totaled 35 globally, with 27 in the United States. Additionally, the company had its first robot sale in Japan, where the approval for Mako is expected by the end of 2018.
About 200 surgeons have been trained during the reported quarter, since the integration of Mako. Moreover, Mako Total Knee procedures for 2017 were 15,778, with 20% more competitive surgeons using the Triathlon Total Knee implant for the first time.
Mako utilization rates have surged more than 40% on a year-over-year basis. The company exited the year with 372 Mako robots installed in U.S. hospitals, representing 10% of its customer base.
R&D Edge: During the fourth quarter, Stryker continued to invest in internal innovation. R&D expenses totaled 5.9% of the sales in the reported quarter and 6.3% on a full-year basis.
Margins
Adjusted gross margin in the fourth quarter is 66.4%, flat year over year. Per management, gross margin was affected by productivity issues associated with the continued recovery of the Puerto Rico manufacturing facility. Operations in the facility were disrupted, thanks to natural calamities. Further, unfavorable pricing and integration risks dented margins.
Operating margin in the quarter is 27% of net sales, down 70 basis points from the year-ago quarter.
2017 At a Glance
On a full-year basis, revenues grew 9.9% to $12.44 billion, while adjusted earnings increased 11.9% to $6.49.
Orthopedics segment reported 37.9% of net sales and MedSurg accounted for 45.2% of total sales. Neurotechnology & Spine contributed 17.7% of total revenues.
FY18 Guidance
Stryker expects net sales to be positively impacted by 1% in 2018, courtesy of favorable foreign exchange rates.
Adjusted earnings are expected in the range of $7.07-$ 7.17. For the first quarter of 2018, the earnings guidance is $1.57-$1.62.
The company anticipates organic sales growth in the range of 6-6.5% for 2018.
Management announced capital expenditures in the range of $550-$600 million compared with approximately $600 million in 2017.
Financial Position
Stryker continues to maintain a strong balance sheet with $2.8 billion of cash. Cash flow from operations was approximately $1.6 billion in 2017.
Total debt at the end of the year amounted to $7.2 billion.
Our Take
Stryker Corporation exited the fourth quarter and the full year of 2017 with impressive earnings and revenue figures. The company’s solid product portfolio, outstanding Mako Total Knee performance and R&D initiatives buoy optimism. However, high debt and the Sage product recall issues are concerns.
Zacks Ranks & Key Picks
Stryker carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the broader medical sector are ResMed RMD, PerkinElmer PKI and Accuray ARAY. All the three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ResMed posted second-quarter fiscal 2018 adjusted earnings per share of $1, up 36.9% from the prior-year quarter. Revenues in the reported quarter increased 13.4% year over year (up 11% at constant exchange) to $601.3 million.
PerkinElmer reported fourth-quarter 2017 adjusted earnings per share of 97 cents. Adjusted revenues were approximately $641.6 million, up from $567 million in the year-ago quarter.
Accuray reported a loss of 6 cents per share in second-quarter fiscal 2018, 5 cents narrower than the year-ago figure. Total revenues in the second quarter improved 15% year over year to $100.3 million.
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