Maintaining its streak of positive earnings surprises, Kalamazoo, MI-based medical technology company Stryker CorpSYK reported adjusted earnings of $1.78 per share in the fourth quarter of 2016, which comfortably beat the Zacks Consensus Estimate by 2 cents and improved 14.1% from the year-ago quarter.
Meanwhile, over the last four trailing quarters, the company posted earnings beats, the average being 1.9%. Currently, Stryker has a Zacks Rank #3 (Hold).
The upside in earnings was primarily driven by a 16.3% rise in revenues to $3.157 billion, which marginally beat the Zacks Consensus Estimate of $3.152 billion. At constant currency (cc), net sales improved 16.8% from the year-ago quarter.
Coming to full-year results, Stryker registered net sales of $11.3 billion, which increased 14.3% at cc. Meanwhile, adjusted net earnings of $5.80 rose 13.3% year over year.
The major segments of Stryker are Orthopedics (accounting for 38.9% of net sales), Medsurg (43.3%) and Neurotechnology & Spine (17.6%). All the segments recorded year-over-year growth of 5.1%, 26.3% and 9.8%, respectively, at cc.
Over the last three months, the stock added 10.6%, comparing favorably with the Zacks classified Medical Products market's decline of 1.4%. Furthermore, a long-term expected earnings growth rate of 9.52% instills confidence in investors.
Additionally, a one-year return of 26.5% compared to S&P 500's 17.6% gain justifies the solid full year performance.
MAKO results in the quarter were solid, with almost 32 global installations of robots, of which 24 were in the U.S. For the full year, MAKO installations were 86, implying an increase of 14 robots on a year-over-year basis. Additionally, the acquisitions of Sage Products and Physio-Control added $258 million and $740 million to the company's net sales in the quarter and full year, respectively.
Organic sales growth was 6.7% in the quarter, with U.S. sales increasing 6.3%, courtesy of solid performances by MedSurg and Neurotech. International segments posted growth of 7.7% on strong momentum in Europe and a return to growth in emerging markets (China).
Management expects strong performance in Europe, Canada and Australia. For the full year, the company witnessed growth of 6.4% organically, which was at the upper end of the previously provided guidance of 6% to 6.5%.
Orthopedic - Sales increased 5.3% at cc to $1.2 billion, driven by a 5.7% rise in 'Knees' sales and 8.4% growth in 'Trauma & Extremities'.
The growth in the platform was buoyed by solid demand for the company's 3D printed products, Foot and Ankle portfolio and strong performance in its European business. Notably, the platform gained 3.9% organically and 4.8% at cc. Solid procedure growth in both partial knees and hips using MAKO was also encouraging.
MedSurg - Sales surged 32.1% at cc to $1.4 billion. Excluding the impact of acquisitions, MedSurg posted organic growth of 8.3%. The growth was fueled by a 7.4% increase in the sale of instruments in the U.S., courtesy of the recent Neptune 3 launch in the platform.
Coming to Endoscopy, this platform delivered U.S. organic growth of 5.9%, thanks to its solid portfolio which includes video products, the latest generation 1588 AIM camera generation platform and other communications and light products.
The Medical division at MedSurg primarily benefitted from double-digit growth of core bed and power cot products.
Internationally, MedSurg organic sales growth was 11.4% in the quarter, driven by strong European and Australian sales.
Neurotechnology and Spine - Segmental sales increased 8.6% at cc to $526 million, primarily owing to an 11.4% rise in Neurotechnology sales, which include neurovascular, CMF and NSE.
Internationally, neurotechnology and spine had cc and organic growth of 11.6%, supported by solid performances in the markets of Europe and Asia.
However, the spine section of the business segment has been grappling with supply issues for long. However, management noted solid demand for its newer 3D printed Tritanium products.
Adjusted gross margin in the quarter was 66.3%, down 90 basis points (bps) on a year-over-year basis, thanks to acquisitions and foreign currency exchange.
Stryker Corporation Price and EPS Surprise
Research and development (R&D) expenses accounted for 6% of net sales, as the company continues to invest in internal innovation.
SG&A expenses for the fourth quarter, as a percentage of revenues, expanded 110 bps to 32.6% on a year-over-year basis, primarily due to sales mix, recent acquisitions and operating efficiencies.
Notably, operating margin accounted for 38.6% of revenues, increasing 100 bps on a year-over-year basis. Strong operating performance was offset by business mix, pricing and foreign exchange in the quarter.
For the first quarter of 2017, Stryker expects adjusted earnings in the range of $1.40-$1.45 per share. For the full year, the company expects adjusted earnings in the band of $6.35 to $6.45.
An unfavorable foreign exchange rate is expected to impact the first quarter and full-year net sales by roughly 1.0%. Furthermore, foreign exchange volatility will affect the adjusted earnings per share by approximately 3 cents to 4 cents in the first quarter and 10 cents to 12 cents in the full year.
Stryker expects organic sales growth of 5.5% to 6.5% for full-year 2017.
The company projects adjusted effective tax rate in the range of 16.5% to 17.5% for the full year. Additionally capital expenditures are expected to be roughly $450 million.
We believe Stryker's innovative product pipeline will be a key catalyst in the near term. Furthermore, growing adoption of MAKO will drive sales in the orthopedic and reconstructive surgery market.
On the flip side, China might prove to be a challenging market for the company. Coming to supply-side headwinds, the company has been grappling with supply issues in the spine business for long. We believe this may prove to be a major drawback in the quarters ahead.
Nevertheless, Stryker's efforts on sales force management should bode well.
Stocks to Consider
Better-ranked stocks in the broader medical sector include Addus Glaukos Corporation GKOS , ARIAD Pharmaceuticals, Inc. ARIA and Hologic, Inc. HOLX . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
Glaukos Corporation has a long-term expected earnings growth rate of approximately 25%. Notably, the stock represents an impressive one-year return of 150.1%.
ARIAD Pharmaceuticals estimates sales growth at around 28.9% for the current year. Additionally, the company posted a promising one-year return of almost 336.4%.
Hologic has a long-term expected earnings growth rate of approximately 10.32%. Notably, the stock represents an impressive one-year return of 8.07%.
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