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Earnings Preview: Stryker - Analyst Blog
1/23/2012 1:45:00 PM
Orthopedic major Stryker Corporation ( SYK ) is slated to report its fourth quarter and fiscal 2011 results after the closing bell on Tuesday, January 24. The Michigan-based company announced, on January 10, preliminary sales data for the quarter and the fiscal.
Per the pre-announced results, revenues for the fourth quarter jumped 11% year over year to $2.2 billion. For the full year, sales soared 13.5% to $8.3 billion. The results were essentially in line with the Zacks Consensus Estimates.
Revenues from Stryker's core Reconstructive division edged up 0.7% and 1.5% in the fourth quarter and fiscal 2011, respectively, reflecting softness in this business. Sales from the MedSurg unit surged 11.1% while Neurotechnology and Spine revenues climbed 46.8% in the quarter.
Stryker raised the bottom end of its adjusted earnings guidance for fiscal 2011 which is now expected to range between $3.72 and $3.74 a share versus $3.70 and $3.74, earlier. Analysts polled by Zacks currently expect earnings of $1.03 and $3.73 a share on average for the fourth quarter and the fiscal, respectively.
The company expects to record a charge of roughly $76 million ($60 million net of tax) in the fourth quarter in connection with its previously communicated headcount reduction and other restructuring moves. Moreover, Stryker anticipates a benefit of roughly $99 million (after tax) or 26 cents a share in the quarter, stemming from a favorable settlement with the U.S. Internal Revenue Service.
Along with the pre-announced results, Stryker unfurled its outlook for fiscal 2012. The company expects adjusted earnings for the year to grow at a double-digit bracket over fiscal 2011.
Third Quarter Flashback
Stryker's third-quarter 2011 adjusted (excluding acquisition charges) earnings per share of 91 cents beat the Zacks Consensus Estimate by a couple of cents. Profit (as reported) clipped 3% year over year, hit by a $25 million charge associated with the company's takeover of Orthovita, Memometal Technologies and Boston Scientific 's ( BSX ) Neurovascular business.
Revenues spurted roughly 15% year over year to $2,031 million, in line with the Zacks Consensus Estimate. The healthy growth was triggered by higher sales across the board, strongly backed by acquisitions.
Sales from the company's Reconstructive unit rose 8% in the quarter (up 3.9% barring the currency exchange translation impact). Growth across the hips, trauma and extremities segments coupled with contributions from acquisitions was, in part, masked by a still-weak knee business.
Revenues from the MedSurg division spiked 12% (up 9.8% in constant currency) year over year, buoyed by healthy demand for the company's bed and stretcher offerings. Neurotechnology and Spine products sales ballooned roughly 46% (up 43% in constant currency).
Estimate Revisions Trend
Estimates for the fourth quarter exhibit relative lack of activity over the past week with just 1 analyst (out of 25) having lowered his/her forecast while none moving in the opposite direction. There has been a downswing over the last 30 days with 3 analysts having trimmed their forecasts with none raising their estimates.
Estimates for fiscal 2011 demonstrate limited movements over the last 7 days with 1 (out of total 27 analysts) having raised his/her estimate with a solitary movement in the reverse direction. Over the last 30 days, there have been two positive revisions accompanied by a couple of reverse movements.
Given the lack of revisions, the estimate for the upcoming quarter has been stationary over the last week and month (at $1.03 a share). A similar trend applies to the estimate for fiscal 2011 which stays at $3.73 a share over the corresponding periods.
With respect to earnings surprises, Stryker has posted three positive surprises in the preceding four quarters while it met the Zacks Consensus Estimate on one occasion. The company has produced an average positive earnings surprise of 2.23% over the last four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.
We believe that Stryker is poised for growth powered by a well diversified portfolio, new products and acquisitions. The company is expanding its product range by acquiring complementary businesses. Stryker was involved in a series of acquisitions in 2011 pressed by sustained pricing and procedure volume pressure in its core replacement hips and knees businesses.
We expect new products including the hip systems, ADM Restoration and MDM X3 (Modular Dual Mobility) to favorably impact Stryker's revenues. The ongoing transition from metal-on-metal (MoM) hip implants to next-generation hip systems represents a tailwind for the company.
While Stryker's knee franchise is still struggling, the new OtisMed pre-op surgical cutting guides should rekindle growth in this business. We expect the company to provide an update on the initial uptake of OtisMed in its fourth quarter call.
Stryker has embarked on several restructuring initiatives (including headcount reduction) in an effort to boost productivity and neutralize costs associated with the implementation of the new government-mandated Medical Device Excise Tax (scheduled in 2013). Moreover, the company remains committed to deliver incremental returns to investors leveraging a solid balance sheet, healthy free cash flow and earnings power.
However, Stryker operates in a highly competitive orthopedic industry and faces strong competition from players like Zimmer ( ZMH ), Johnson & Johnson 's ( JNJ ) DePuy and Smith & Nephew ( SNN ). Moreover, it remains challenged by the sustained lumpiness in the reconstructive implant market and pricing and elective procedure volume still remains headwinds.
The reconstructive market fundamentals remain challenging given a host of macro issues including high unemployment and expiry of health insurance. We expect the company to provide some color on the pricing/volume as well as capital spending trend in its fourth quarter commentary. Our Neutral recommendation on Stryker is backed by a short-term Zacks #3 Rank (Hold).
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