Streetwise for Sunday, August 4, 2019

Peter Lynch wrote in his 1989 best seller, “One Up on Wall Street.” that the Greeks used to sit around and debate the number of teeth a horse has. Somehow, they thought that was a better method than counting the teeth in a sampling of horses. 

In a like manner, many investors sit around and debate whether the markets are going higher or lower, as opposed to “counting the teeth” of potential investments.

Lynch also pointed out that investment opportunities are often derived from your own experiences. To that end, I want to revisit Stryker Corporation (SYK), a company that produces implants for knee replacement, of which I have two.

A year ago, my earnings estimate for 2018 was $7.25 per share with a 12-month projected share price of $182, yielding a 10 percent capital gain. There was also an indicated dividend of 1.08 percent. 

So how did the company do? Earnings for 2018 came in at $7.31 and the shares recently closed at $209.78. Since January of this year, Stryker’s shares are up 39.28%. However, the key question what Stryker has and will do going forward.

The company released its second quarter results on July 25, and once again posted excellent numbers, as the company continues to gain market share.

Sales revenue increased 9.9% to $3.7 billion, with organic sales accounting for 8.5% of that growth. Operating income margin was 16.8%. Earnings per share increased 5.9% to $1.26.

From an organic growth perspective, revenue was up 8%, with the U.S. up 9% and foreign revenues up 7%. Growth was led by MedSurg (medical/surgical) up 11.5%, Neuro/Spine up 7.4% and Ortho (Orthopaedic) up 5.6%. The company’s gross margin declined slightly, and operating income rose 10%.

By sector, Ortho saw revenues of $1.27 billion, up 3.7% year over year. The performance can be attributed to better results in the Knee and Hips sub segments. The company continues to see solid demand for its Mako TKA (Total Knee Arthroplasty) platform or cementless knee and other 3D printed products, along with shoulder implants. (Again, I have two of those also.)

MedSurg reported sales of $1.62 billion, up 11.1% year over year. The segment grew 11.5% organically, led by strong Endoscopy, Instruments and Medical performances.

Neurotechnology & Spine sales were $760 million, up 18.9% year over year. With organic growth of 7.4%. The upside was due to solid demand for Neurotech products, partially offset by somewhat lower spine organic growth owing to the company’s focus on the integrating its legacy Spine business with K2M, a firm it acquired in 2018.

Stryker continues to see impressive growth in knee replacements, up about 6%. With Johnson & Johnson reporting a nearly 1% decline and Zimmer Biomet growing less than 3%, Stryker is clearly the winner.

The company’s Mako robotics system is gaining share in knee replacements. Stryker sold 44 robots this past quarter, with over 700 now in place. Total knee procedures on the Mako were up 80%. 

Stryker is also starting to see more traction in hips with Mako, due in part to its 3D-printed Titanium press-fit implant. As a result, revenue from that sector rose 4% this past quarter, ahead of the 3.3% growth at J&J and the 1% growth at Zimmer.

Going forward, Stryker’s management now expects 2019 organic net sales growth to be in the range of 7.5% to 8.0% and net earnings per share to be in the range of $8.15 to $8.25. 

For the third quarter projected net earnings per share should be in the range of $1.87 to $1.92 per share. 

If foreign currency exchange rates hold steady, net sales in the third quarter will be nominally impacted and the full year negatively impacted by approximately 1.0%. Earnings per share will be nominally impacted in the third quarter and negatively impacted by approximately $0.10 per share for the full year.

The intrinsic value of the shares using a free cash flow to the firm model produces an intrinsic value of $202 per share, so you might want to wait for a pullback. I would also suggest trying a discounted earnings or discounted dividend model.

My earnings estimate for this fiscal year is $8.20 per share with a 12-month projected share price of $230, yielding a 10 percent capital gain. There is also an indicated dividend yield of 0.97 percent.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to