Streetwise for Sunday, August 6, 2016
As an owner of many horses, probably too many, I relate to what Peter Lynch wrote in his 1989 best seller, “One Up on Wall Street.” He pointed out 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 made another observation. He pointed out that investment opportunities are often derived from your own experiences. I am going to expand on that a bit and say they can also be derived from the experiences of others. And in Sarasota, you can bet conversations will often turn to medical procedures.
Therefore, I want to revisit Stryker Corporation (SYK), a company I have not talked about for several years. And I can relate to the company because they produce implants for knee replacements and I have had both knees done.
Stryker released its second quarter earnings on July 27, reporting adjusted (meaning that one-time events are subtracted) EPS (earnings per share) of $1.53, exceeding the consensus of $1.51. The result represents a YoY (year-over-year) increase of about 10.1 percent.
Net earnings came in at approximately $391.0 million, resulting in a growth rate of about 2.8 percent. However, Wall Street was looking for $493.0 million. Unfortunately, earnings were impacted by the intangible assets of amortization, acquisition, restructuring, integration-related activities, legal matters and several recall-related matters.
So, it was no surprise that on the day of the release, Stryker’s share price fell approximately 1.3 percent from the prior day’s closing price of $145.70. Notably, Stryker did raise its 2017 guidance as part of the earnings announcement. Nonetheless, the shares have recovered and recently closed at $145.12.
For the quarter, Stryker posted revenues of approximately $3.0 billion. registering strong growth of 6.1 percent on a YoY (year-over-year) basis and exceeded the consensus estimate of $2.98 billion.
On a currency-neutral or constant currency basis (eliminating currency fluctuations) revenue growth for the quarter was 6.9 percent YoY. The growth included a 0.20 percent acquisitions contribution and a negative pricing impact of around 1.5 percent, resulting in organic revenue growth of 6.7 percent.
Stryker’s gross profit margin for the second quarter came in at about 66.3 percent of revenue. Operating income for the quarter was 25 percent of revenue. The company’s R&D (research and development) investments were 6.4 percent of total sales, whereas SG&A (selling, general, and administrative) expenses rose on a YoY basis to 35.0 percent of sales.
Nonetheless, Stryker has realized cost efficiencies through its CTG (Cost Transformation for Growth) program, planned investments in sales and commercialization initiatives, and its Mako platform.
Stryker’s adjusted operating margin was about 25 percent of sales, an improvement of 20 basis points (0.20 percent) on a YoY basis. However, adjusted operating expenses were flat compared to the prior year’s quarter.
Looking at the company’s competition in their recently ended quarters, Zimmer Biomet, Abbott Laboratories, and Thermo Fisher Scientific reported net earnings of $184.2 million, $283.0 million, and $612.0 million, respectively.
The intrinsic value of the shares using the ValuePro.net conservative free cash flow to the firm model produces an intrinsic value of $172 per share. My earnings estimate for this fiscal year is $6.45 per share with a 12-month projected share price of $161, yielding a 10 percent capital gain. There is also an indicated dividend of 1.15 percent.
Note to readers – Save the Date – Rudd International is sponsoring an open house in support of Southeastern Guide Dogs, a non-profit, 5 to 7 PM on Tuesday, August 15. All are welcome. Donations not required. Please RSVP 706-3449.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
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