Medical equipment manufacturer Stryker Corporation (SYK), which was founded in 1941 and is based in Kalamazoo, Michigan, has gained 31.9% over the past nine months, despite an overall depressed industry backdrop. As people reduced their non-emergency hospital visitations last year, the demand for optional surgery fell dramatically.
However, SYK, which specializes in medical equipment catering to orthopedics, medical and surgical, neuroscience and spine treatments, witnessed decent demand. The stock has gained 30.5% over the past six months, and 3.7% over the past month.
Here’s what I think should drive SYK’s performance through the remainder of this year:
Sound Corporate Governance
SYK has an Institutional Shareholder Service (ISS) Governance Quality score of 1, which indicates low governance risk. SYK has acquired several companies in the medical equipment industry over the last couple of months to strengthen its foothold in the market.
Last month, SYK acquired OrthoSensor, Inc. to streamline its operations in the musculoskeletal and sensor technology for joint replacement. In this regard, SYK’s Group President, Orthopedics and Spine, Spencer Stiles stated, “Smart devices and implants will play a big role in orthopedics and we are excited for OrthoSensor to join Stryker as we continue to innovate and advance smart sensor technologies, including intraoperative sensors, wearables and smart implants across our joint replacement business.”
In November, SYK acquired medical device manufacturer Wright Medical Group N.V. This acquisition is expected to consolidate SYK’s position in the trauma and extremities segment, given Wright Medical’s diverse product portfolio and customer base catering to this segment.
Strong Financials and Profitability
Though SYK’s operations were severely impacted due to the mass postponement of most non-critical surgeries and COVID-19 social contact restrictions, the company reported impressive earnings for the fourth quarter ended December 31, 2020. Its net sales have increased 3.2% year-over-year to $4.30 billion owing to a 4% rise in the Orthopedics segment sales. Its adjusted operating margin rose 90 basis points from its year-ago value to 29.2%, while its adjusted EPS grew 12.9% from the same period last year to $2.81.
SYK’s has generated $14.35 billion in revenues in the trailing 12 months. Its trailing 12-month net income and EPS values are $1.60 billion and $4.20, respectively.
SYK’s trailing 12-month gross profit margin of 63.81% is 14.1% higher than the industry average 55.94%. And its trailing 12-month EBITDA margin and leveraged free cash flow margin of 26.17% and 19.34% are significantly higher than industry averages.
Furthermore, SYK’s ROE and ROA of 12.35% and 4.66%, respectively, compare favorably with the negative industry averages.
Impressive Growth History and Future Prospects
SYK’s revenues have increased at a CAGR of nearly 5% over the past three years. Both its net income and EPS rose at a CAGR of 16.2% over this period. The company’s leveraged free cash flow has increased at a CAGR of 44.9% over the past three years, while its total assets grew at a CAGR of 15.6% over this period.
Analysts expect SYK’s EPS to rise 228.1% in the fiscal second quarter ending June 30, 2021, 22.2% in the current year, and at a rate of 10.4% per annum over the next five years. A consensus revenue estimate of $3.98 billion for fiscal 2021 represents a 10.8% improvement year-over-year.
Consensus Rating and Price Target Reflect Potential Upside
SYK hit its all-time high of $246.69 on February 12. Analysts expect SYK to break out of this resistance level and hit $251.91 soon, indicating a potential upside of 3.7%. The stock has an average broker rating of 1.59, indicating favorable analyst sentiment. Of 29 Wall street analysts that rated the stock, nine rated it Strong Buy and seven rated it Buy.
Favorable POWR Ratings
SYK has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
Our proprietary rating system evaluates each stock on a total eight different categories. The stock has a grade of B for Growth and Stability. This is justified, given the company’s future growth potential and past performance.
In the 180-stock Medical – Devices & Equipment industry, SYK is ranked #48. In addition to the grades I’ve highlighted, you can check out SYK ratings for Momentum, Quality, Sentiment and Value here.
Click here to check out other stocks in the Medical – Devices & Equipment industry with an overall rating of A or B.
Bottom Line
With the mass coronavirus vaccination drive currently being executed , the healthcare industry is expected to operate at its pre-pandemic levels soon. As people schedule their previously deferred surgeries later this year, we expect demand for SYK’s state-of-the-art equipment to rise.
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SYK shares were trading at $246.13 per share on Tuesday afternoon, down $2.02 (-0.81%). Year-to-date, SYK has gained 0.44%, versus a 5.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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