We reaffirm our Neutral recommendation on
). Stryker reported second quarter 2012 adjusted earnings of 98
cents per share, in line with the Zacks Consensus Estimate and
surpassing the year-ago earnings of 90 cents per share. Profits
increased 4.8% year over year to $325 million (or 85 cents a
share), led by higher domestic sales and margin expansion.
Revenues were up 2.9% (up 5% in terms of constant currency) year
over year to $2,106 million, but fell short of the Zacks Consensus
Estimate of $2,129 million. Revenues were driven by healthy sales
across its three segments in the U.S., partially offset by a weak
European economy and currency fluctuations.
Stryker keeps introducing new products in the market at regular
intervals. The company recently unveiled the next-generation
Accolade Primary Hip Stem (Accolade II). This system is a notch
above the company's leading Accolade cement-less stem and is
already on track to boost the Reconstructive business.
In addition, the Endoscopy division recently launched the 1488
High-Definition Camera with greater picture clarity which is
expected to benefit surgeons during minimally invasive
Stryker continues to achieve healthy revenues, fueled by
positive growth across all three segments of the company's U.S.
franchises. The Neurotech business is posting strong results on the
back of Orthovita and Concentric acquisitions. The MedSurg division
continues its healthy growth momentum, triggered by the Ascent
acquisition and sustained growth across itsInstruments and
Sustainability Solutions business.
Most importantly, in the Orthopedic Reconstructive division,
domestic Hips, Knees and Trauma and Extremities sales have started
showing signs of improvement with Trauma gaining significant
grounds led by acquisitions.
However, the company's mainstay, the Reconstructive business is
facing pricing pressure and losing market share due to
uncertainties prevailing in Europe.
Apart from macroeconomic headwinds, internal shortcomings
related to executing organizational changes within the business
have been hampering the business for quite some time now. Stryker
needs to stay focused and stay on top and execute these changes
before a combination of both external and internal issues start
affecting the business adversely.
Recently, Stryker globally recalled the Rejuvenate and the ABG
II Modular hip stem due to some product defaults which caused
adverse local tissue reactions. This has resulted in a higher
inventory which negatively impacted gross margin in the second
quarter of 2012. Similar product recalls in future will negatively
impact the company's bottom line.
Stryker operates in a highly competitive industry and faces
strong competition from players like
Johnson & Johnson
) DePuy and
Smith & Nephew
). Moreover, the strengthening U.S. dollar, against the weak Euro
and to some extent the Japanese Yen, is affecting the company's
Although the company did not change its guidance, it anticipates
that the negative impact of foreign currency on net sales will be
higher, given the euro volatility.
Our long-term Neutral recommendation on Stryker is in agreement
with the short-term Zacks #3 Rank (Hold).
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