In this article, let's take a look at Stryker Corporation (SYK, Financial), a $31.07 billion market cap company that makes specialty surgical and medical products such as orthopedic implants, endoscopic items, and hospital beds.
Innovation in Key Markets
The company is a top competitor in several medical markets. It focuses on new product launches, as well as trying to increase its positions in order to keep competing in the industry. Another issue the firm is conscious about is the cost. If we take into account costs derived from research, the ones related to new products, technical support and compliance with regulations, we are talking about more than 5% of annual sales.
Stryker moves in a different direction than its peers; for example, Zimmer (ZMH, Financial) has diversified its reliance on reconstructive implants that were affected by the economic recession when patients deferred elective procedures.
The MedSurg Products segment, which accounts for 37.3% of 2013 sales, smooths over the effects of those scenarios.
Furthermore, the great variety of products allows the firm to have more opportunities of innovation. With acquisitions of specific technology, it has much more potential to innovate. Examples could be the Patient Safety Technologies, Small Bone Innovations, Surpass, and Concentric.
The application of technologies from one segment to another is not as easy as the one Medtronic (MDT, Financial) could employ. This clearly makes it difficult to realize additional return on R&D investment.
Estimated One-Year Price
According to Yahoo! Finance, the estimated one-year target share price is $89.41, so if you buy shares at the current market price ($81.51), your return from price appreciation would be 9.7%. In addition, you have to consider any cash flow received by the asset. By holding the stock for one year, you'll be paid a dividend of $1.22 at the end of the year. If we divide this number by the current price per share, we obtain the dividend yield of 1.5%, which is the other component of the return on an investment for a stock. The total expected return for investing in Stryker is 11.2%, which we believe is an attractive stock return.
Revenues, Margins and Profitability
Looking at profitability, revenues increased by 6.82%, but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.33 vs $0.56). During the past fiscal year, the company reported lower earnings of $2.63 versus $3.39 in the prior year. This year, Wall Street expects an improvement in earnings ($4.77 versus $2.63).
The gross profit margin is considered high at 68.18% and the net profit margin of 5.41% is similar to the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| SYK | Stryker | 7.73 |
| ABT | Abbott Laboratories | 10.14 |
| MDT | Medtronic Inc | 15.65 |
| COV | Covidien PLC | 15.86 |
| BAX | Baxter International Inc | 23.83 |
| Â | Industry Median | 5.99 |
Stryker has a current ROE of 7.73% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Medtronic, Covidien (COV, Financial) and Abbot (ABT, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 46.0x, trading at a discount compared to an average of 60.8x for the industry. To use another metric, its price-to-book ratio of 3.50x indicates a premium versus the industry average of 3.46x while the price-to-sales ratio of 3.40x is above the industry average of 3.08x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $19,463, which represents a 14.3% compound annual growth rate (CAGR).
Final Comment
As outlined in the article, the company aims for innovation and remains competitive. Acquisitions are very important; for example, the acquisition of Trauson would impact on the Chinese market.
The PE relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like George Soros (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
