Earnings Cheat Sheet: The Long and Short of Stryker

Stryker (SYK) is a medical technology company that operates in two segments. The larger segment is Orthopedic Implants – – hips, knees, spine, and trauma. The second segment is MedSurg, which sells surgical equipment, surgical navigation systems, and other emergency medical equipment. The company is headquartered in Kalamazoo, Michigan.

Stryker reported Q3 results that were slightly better than expectation across most metrics. Revenues grew 7% on a constant currency basis, to $1.77bn (expectations had been $1.75bn). EPS came in at $.80 (vs expectations of $.77). The company raised the low end of its guidance for the year, but kept the high-end the same – – new guidance is $3.27-$3.30.

In the Orthopedic side, sales were up 1% for the quarter, to just over $1bn. Hips, knees and spine all grew 1% or less. Trauma grew 4%. The Company appeared to have headwinds on both the volume and price side, although they did not that trends appear stable. Pricing was down 1.8% in the quarter. It is likely that the economy is having some impact on the volume side as patients put off expensive surgeries in this environment. The Company seems to be banking on a new product pipeline to accelerate sales somewhat in 2011.

Growth was stronger on the MedSurg side, up 16% to $739mm. The company noted higher shipments of surgical equipment and surgical navigation systems. Growth was also supplemented through acquisitions, which accounted for 6% of the growth. Management seemed comfortable that MedSurg could grow at least mid-single digits for the intermediate term.

While revenues were somewhat lackluster for the overall company, margins were very strong. Operating margins grew 230bps over last year to 25.2%. The Company sited favorable FX as well as “disciplined SG&A expense management.”

Balance sheet very strong, with cash/equivalents of approximately $4.5bn. Long term debt was approximately $1.0. The Company hoped to use some of this war chest for acquisitions, but also committed to share repurchases and dividends (1.2% yield).

SYK is an interesting company. One would think that demographics (aging baby boomers) and our overweight society (more weight is bad for knees and hips) would be very good for Stryker in the intermediate term. In the short-term, though, it is battling a tough economy and an uncertain reimbursement healthcare/reimbursement environment that has put a damper on its results. If one believes the out year estimates for SYK (2011 EPS estimates are $3.64), you can buy a decent business that many think can grow double digits for quite a while, for less than 14x 2011 EPS. It was only 3 years ago when SYK consistently sported a P/E multiple closer to 25x. Will the short-term rule, or will investors look out a bit further?

Disclosure: Position in SYK.