Ticker:
SYK
Sector:
Healthcare
Industry: Medical Instruments &
Supplies
Stryker Corp. (SYK)
Company Profile
Recommendation:
Hold
Pricing
Closing Price
52-wk High
52-wk Low
$51.92 (2-1-10)
$57.39 (1-19-10)
$30.82 (3-20-09)
Market Data
Market Cap
Total assets
Trading vol.
$20.65 B
$7.60 B
1.9M (3mon avg)
Valuation
EPS (ttm)
P/E (ttm)
PEG
Div Yield
$2.77
18.83
1.33
1.15
Profitability & Effectiveness (ttm)
ROA
12.46%
ROE
18.45%
Profit Margin 16.47%
Oper Margin 24.71%
Gross Margin 67.52%
Stryker Corporation, together with its subsidiaries,
operates as a medical technology company worldwide. It
operates in two segments, Orthopaedic Implants and MedSurg
Equipment. The Orthopedic Implants segment provides
orthopaedic reconstructive, trauma, craniomaxillofacial, and
spinal implant systems; bone cement; and the bone growth
factor OP-1. The MedSurg Equipment segment offers surgical
equipment; surgical navigation systems; endoscopic,
communications, and digital imaging systems; and patient
handling and emergency medical equipment. Stryker
Corporation sells its products through local dealers and direct
sales force to doctors, hospitals, and other healthcare facilities.
The company was founded in 1941 and is headquartered in
Kalamazoo, Michigan.
Stryker’s global market consists of North and South
America, Europe, Middle East, Africa, Asia, and the Pacific.
About two-thirds of Stryker’s sales come from our domestic
market and one-third from international markets. This ratio is
continually evening out as the demand abroad increases.
Percentage Sales
36%
Domestic
International
ANALYST NAME
64%
Justin Nagel
jbnnp3@mail.missouri.edu
Product Lines
Orthopaedic1
Orthopaedic Implants are designed and manufactured by Stryker Orthopaedics, Stryker
Osteosynthesis, Stryker Spine and Stryker Biotech and consist of such products as implants used
in joint replacement, trauma, craniomaxillofacial, and spinal surgeries; bone cement; and the
bone growth factor OP-1, along with screws, plates, nails, and rods . The Company supports
surgeons with technology, procedural development and specialized instrumentation as they
develop MIS techniques. The Company's surgical navigation systems are used in MIS
procedures to improve the accuracy of measurements and to position the implant.
Orthopaedic Implants
A large part of Stryker’s product mix deals with orthopaedic implants that include: hip,
knee, joint, shoulder, and elbow implants. For these surgeries the implants are made up of
artificial joints that consist of cobalt chromium, titanium alloys, ceramics or ultrahigh molecular
weight polyethylene and are implanted in patients whose natural joints have been damaged by
arthritis, osteoporosis, other diseases or injury. The Company’s reconstructive implants are
suited to minimally invasive surgery (MIS) procedures that are intended to reduce soft-tissue
damage and pain while hastening return to function.
ex. A product that is awaiting release is the X3 Polyethylene and is supposed to be the
next generation implant because of its highly cross linked polyethylene. This implant should
offer a higher level of strength and wear reduction in both hip and knee replacements. As well as
increase the implants longevity.
ex. Within the category of the knee implants a new product using the X3 material along
with the new Triathlon PKR (unicompartmental knee system). Has been designed to resurface
specific areas, and leave healthy areas intact. This should help increase mobility and stability of
the knee. In 2008 this new system was released in Europe and Canada, and soon will be available
in the Japanese market.
Bone Cement
Of the products that are available in Stryker’s portfolio, their bone cement product
Simplex Bone Cement is the most widely used cement in the world. This cement has been
available to the market for over 50 years. In addition, they have developed other cements such as
non-antibiotic and antibiotic cement, and SpeedSet Cement in order to cater to the needs of
physicians.
Trauma Systems
This segment of orthopaedic’s includes shafts, wiring, nailing, plating, external fixation
systems and bone substitutes. Stryker has expanded the selection within this category to include
long and short nails, smaller diameter pins for foot and ankle surgery, as well as a cannulated
screw system to assist surgeons in placing, inserting, and removing locking screws more easily.
Spinal
Stryker develops, manufactures, and markets spinal implant products that include: plates,
rods, screws, connectors, spacers, and cages for use in spinal surgeries.
Craniomaxillofacial
Stryker provides products that are used in reconstructive/plastic surgeries that are done on
the anatomical areas of the face. This product line consists of plates, screws, mesh, and
instrumentation for cranial and maxillofacial surgeries.
OP-1 Bone Growth
The company’s OP-1 bone growth factor consists of a natural protein that the body makes
to induce new bone formation when implanted into bone. This product is used currently when
autograft is not feasible and other methods have failed. It is intended to benefit patients by
treating/diagnosing a condition that faces fewer than 4,000 people per year in the U.S. In
addition to the OP-1 Bone Growth factor, Stryker is also improving their OP-1 Putty that is used
in conjunction with spinal surgeries. Furthermore, in development in the OP-1 products is using
this formula for cartilage regeneration properties as well as helping with degenerative disk
disease.
MedSurg1
MedSurg Equipment products include surgical equipment; surgical navigation systems;
endoscopic, communications and digital imaging systems, and patient handling and emergency
medical equipment. These products are designed and manufactured by Stryker Instruments,
Stryker Endoscopy and Stryker Medical. The Stryker Instruments and Stryker Endoscopy
product portfolios include micro powered tools and instruments used in orthopaedics, functional
endoscopic sinus surgery, neurosurgery, spinal surgery and plastic surgery.
Surgical Equipment
This segment includes drilling, burring, rasping, cutting bone; wiring or pinning bone
fractures; and preparing hip and knee surface for placement of artificial implants. Within this
category they have recently developed several new pieces of equipment that are helping make
physicians jobs easier, as well as improving conditions for their patients.
ex. A new bone cements mixing system, offering physician’s one solution for use in
mixing any and all of the surgical cements.
ex. Another piece of equipment recently released is the PainPump2, this item was
designed to electronically control the flow rates of pain medicine, and release the meds directly
to the surgical site to help with discomfort.
Surgical Navigation Systems
The navigation systems that Stryker develops and produces further the technology limits
that are available to physicians. These advances in equipment allow electronic images to be
viewed more clearly, and helps reduce the need to place additional pins into surgical incisions
during the operation.
Endoscopic
Stryker is helping to streamline the medical field through the communications and
endoscopic segment with improvements in video imaging technology, and communication
equipment. The communication equipment facilitates local and worldwide sharing of medical
information among operating rooms, doctor’s offices, and teaching institutions. Some of the
products that are offered by Stryker are: medical video cameras, digital documentation
equipment, digital image & viewing software, and powered surgical instruments. The
development of fiber optics and high definition has assisted physicians by allowing them to view
internal anatomy with a much higher degree of clarity.
Patient Handling and Emergency Medical Equipment
Stryker has several products that are available in order to transport and take care of
patients. Some of these products consist of: stretchers, overbed tables, symmetry recliners, and
bed scales. All of the products have functional designs, with comfort and reliable support.
Product Portfolio Sales
41%
Orthopaedic
MedSurg
59%
SWOT Analysis
Strengths
 Broad product portfolio insulating concentration risks
 Robust financial performance building shareholders confidence
Weaknesses
 Geographic concentration enhancing business risks
 Products recall on manufacturing ground impacting reputation
 Low presence in emerging Asian markets may restrict the growth
Opportunities
 New product launches to expand revenue base
 Favorable trend in U.S. demography boosting demand for medical devices
Threats
 Industry consolidation intensifying competition
 Quality reprimand by FDA could adversely affect the company’s business
 Federal Medical Device Taxes
Strengths
As seen above Stryker caters to several firms needs in the healthcare industry by
providing equipment and other supplies to surgeons. That assists them in performing day to day
operations, as well as providing these individuals with the latest in technologically advanced
equipment that is catered to their demands. In catering to the customers’ demands Stryker can
keep their R&D costs down, because they maintain close relationships and listen to what the new
needs and demands are and redefine the current products to fit. Furthermore, Stryker has over 30
years of clinical history with their hip systems, and 20+ years with their cement systems.
Weaknesses
A major weakness that Stryker faces and needs to deal with is that as the world flattens,
they need to make sure that their presence touches everyone around the globe. They are currently
making good progress in establishing their presence in markets such as the Europe market but
need to spread in to other emerging markets before it is too late. Another area that Stryker needs
to be constantly aware of is in its inventory reserves. They maintain a large amount of
inventories but obsolescence is always a factor to a technology device firm.
Opportunities
The majority of the products that Stryker provides are considered products consisting of
short lives, approximately 70%. This is because even though an implant will last for a
considerably long time, it is only used once by the hospitals. In addition, the large turn over those
hospitals have for implants, and the population of baby boomers having more and more problems
with arthritis, osteoporosis, and injury. Stryker has also acquired other companies, such as
Sightline Technologies Ltd., in order to gain market share in areas that it currently operates. This
also helps in further developing the MedSurg area of their portfolio.
Threats
A major factor that could threaten the potential earnings of Stryker and other companies
in the medical equipment and supplies area of healthcare is the proposed Medical Device Tax.
The tax will be issued based on the share of total industry sales from the prior year, unless your
company generates revenue of less than $5 million. This tax as it is currently is going to begin in
2011 and the government wants to receive close to $2 billion per year over the next 10 years.
According to one analysts prediction this tax will hurt the industry’s earnings about 3%-4%.
What this means for Stryker, is that they currently gain 17% after all expenses and taxes are paid
from their sales revenue. If this tax passes Stryker will be setting up to only earn 13-14% from
their total sales revenue.
Competitive Forces
Historical Stock Prices
Over the last year Stryker Corp. has underperformed compared to our benchmark the
S&P 500. However given the circumstances of the recent recession they have made tremendous
progress in recovering what they had lost, and has remained close to the benchmark. Over the
last five years Stryker has outperformed the benchmark slightly.
1 Year
5 Year
Competition
Some of the competition that Stryker Corp. faces in the medical instruments and supplies
industry is: DePuy (subsidiary of Johnson & Johnson), Zimmer Holdings Inc., and Smith &
Nephew plc. These three companies all have similar/proportional numbers as can be seen in the
chart below. For DePuy I was not able to find all of the data needed for this chart but in
reviewing the Johnson & Johnson annual report I did find that DePuy contributed $5 Billion in
sales. This accounted for an 8.8% increase over the previous year, however, they contributed it
primarily to new product launches in the orthopaedic joint reconstructive products.
DIRECT COMPETITOR COMPARISON
SNN
SYK
Industry
ZMH
Market Cap:
8.77B
20.32B
11.68B
130.18M
Employees:
9,757
N/A
8,000
288
Qtrly Rev Growth (yoy):
-1.60%
6.80%
7.50%
17.60%
Revenue (ttm):
3.67B
6.72B
4.10B
75.04M
74.09%
67.52%
75.81%
51.29%
1.09B
2.05B
1.47B
2.92M
22.42%
24.71%
27.71%
0.84%
Gross Margin (ttm):
EBITDA (ttm):
Oper Margins (ttm):
Net Income (ttm):
461.00M
1.11B
717.40M
N/A
EPS (ttm):
2.60
2.773
3.324
N/A
P/E (ttm):
19.09
18.42
16.73
23.63
PEG (5 yr expected):
1.57
1.32
1.46
1.42
P/S (ttm):
2.45
3.11
2.93
2.04
SYK = Stryker Corp.
ZMH = Zimmer Holdings Inc.
Industry = Medical Appliances & Equipment
2 Year
Analysts’ Opinion
The opinions of the analyst’s are very similar for Stryker, and Zimmer Holdings
recommending to either Buy or Hold. However, the analyst’s are recommending to mainly Hold
shares of Smith and Newphew. It may be that they are a foreign company or that they have been
growing in recent years and are not going to be able to sustain that growth. Either way it seems
that Stryker and Zimmer Holdings seem to be fairly similar in their results.
SYK
SNN
ZMH
Stong Buy
6
0
6
Buy
5
1
3
Hold
15
3
16
Underperform
2
0
1
Sell
0
1
0
Valuation
In valuing Stryker I used Warren Buffett’s Owner’s Earnings Model.
Discount Rate:
Beta: .89
Risk free Rate (10 Year T-Bill): 3.2%
Market Return: 11%
K = Rf + β(Rm-Rf)
K= 3.2 + .89(11-3.2)
K=10.14%
Two-Stage Discounted Free Cash Flow Valuation Model
assuming discount rate (k) of
10.00%
Free Cash Flow ("owner earnings") in 2009:
Net Income
Average Increase in Working Capital (subtract)
Depreciation (add)
Amortization (add)
Average Capital Expenditures (subtract)
Free Cash Flow (Owner Earnings)
$
1,147.80
$
(622.00)
$
387.60
$
155.20
$
1,068.60
FIRST STAGE
2010
Prior Year Free Cash Flow
First Stage Growth Rate (add)
Free Cash Flow
Discounted Value per annum
Sum of present value of owner earnings
$
1,068.6
9.0%
$
1,164.8
$1,164.8
$10,401.5
Year:
2014
2011
2012
2013
2015
$1,164.8
9.0%
$1,269.6
6.0%
$1,345.8
6.0%
$1,426.5
8.0%
$1,540.6
7.0%
$1,269.6
$1,154.2
$1,345.8
$1,112.2
$1,426.5
$1,071.8
$1,540.6
$1,052.3
$1,648.5
$1,023.6
SECOND STAGE
Residual Value
$
2,160.8
4.00%
$
2,247.3
6.00%
$
37,454.55
Free Cash Flow in year 10
Second Stage Growth Rate (g) (add)
Free Cash Flow in year 11
Capitalization rate (k-g)
Value at end of year 10
Present Value of Residual
Intrinsic Value of Company
$14,440.35
$24,841.86
Shares outstanding assuming dilution
Intrinsic Value per share
5%
6%
First Stage Growth
Rate
7%
8%
9%
10%
11%
12%
13%
413.6
$60.06
Terminal Growth Rate
3%
4%
5%
46.08
50.33
56.28
49.56
54.23
60.77
53.32
57.37
61.74
66.44
71.5
76.95
82.81
58.45
63
67.91
73.2
78.91
85.05
91.66
65.64
70.89
76.56
82.68
89.28
96.39
104.06
Recommendation
After reviewing this company and the Healthcare industry overall I would agree with the
analyst’s recommendations. For our portfolio our best position for this stock would be to hold the
shares that we have because there is a lot of potential in the medical instruments and supplies
area. Stryker is in a good financial position even if the proposed tax increase should pass. They
are currently making 17% of their total sales revenue as profit. In the event that the tax is
implemented, I am sure it will be shared between Stryker, the hospitals, and the ending customer.
Whatever should happen with the Obama administration and public healthcare, there will remain
a high demand for the products that Stryker produces. Furthermore, in valuing Stryker Corp.
following the same model that Warren Buffett uses the intrinsic value using conservative
numbers gives a number similar to what the stock is currently trading for.
Income Statement
All numbers in thousands
View: Annual Data | Quarterly Data
PERIOD ENDING
31-Dec-08
31-Dec-07
31-Dec-06
Total Revenue
6,718,200
6,000,500
5,405,600
Cost of Revenue
2,131,400
1,865,200
1,848,700
Gross Profit
4,586,800
4,135,300
3,556,900
367,800
375,300
324,600
2,625,100
2,391,500
2,061,700
Non Recurring
34,900
19,800
52,700
Others
40,000
41,400
43,600
3,067,800
2,828,000
2,482,600
1,519,000
1,307,300
1,074,300
61,200
62,800
29,500
1,580,200
1,370,100
1,103,800
-
-
-
1,580,200
1,370,100
1,103,800
432,400
383,400
326,100
-
-
-
1,147,800
986,700
777,700
Operating Expenses
Research Development
Selling General and Administrative
Total Operating Expenses
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
Non-recurring Events
Discontinued Operations
-
30,700
-
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
-
-
Other Items
-
-
-
1,147,800
1,017,400
777,700
-
-
-
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
$1,147,800
$1,017,400
$777,700
Balance Sheet
All numbers in thousands
View: Annual Data | Quarterly Data
PERIOD ENDING
31-Dec-08
31-Dec-07
31-Dec-06
701,100
290,500
416,600
Short Term Investments
1,494,500
2,120,300
998,200
Net Receivables
1,651,400
1,565,100
1,324,200
Inventory
952,700
796,200
677,600
Other Current Assets
179,600
132,800
117,700
4,979,300
4,904,900
3,534,300
Long Term Investments
275,200
-
-
Property Plant and Equipment
963,800
991,600
951,700
Goodwill
567,500
527,400
531,300
Intangible Assets
368,000
398,100
693,400
-
-
-
Other Assets
237,300
360,200
44,500
Deferred Long Term Asset Charges
212,200
171,800
118,600
7,603,300
7,354,000
5,873,800
1,441,600
1,316,200
1,336,700
20,500
16,800
14,800
-
-
-
1,462,100
1,333,000
1,351,500
-
-
-
734,500
642,500
331,300
Deferred Long Term Liability Charges
-
-
-
Minority Interest
-
-
-
Negative Goodwill
-
-
-
Assets
Current Assets
Cash And Cash Equivalents
Total Current Assets
Accumulated Amortization
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
*Other Liabilities*
Total Liabilities
2,196,600
1,975,500
1,682,800
Stockholders' Equity
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Preferred Stock
-
-
-
Common Stock
39,600
41,100
40,800
4,389,500
4,364,700
3,490,500
Treasury Stock
-
-
-
Capital Surplus
812,800
711,900
569,100
Other Stockholder Equity
164,800
260,800
90,600
Total Stockholder Equity
5,406,700
5,378,500
4,191,000
Net Tangible Assets
$4,471,200
$4,453,000
$2,966,300
Retained Earnings
*Other Liabilities
Long-Term Debt
Operating Leases
Unconditional Purchase Obligations
Contribution to defined benefits plans
Other
20.5
166.9
567.9
21.5
21.9
Cash Flow
All numbers in thousands
View: Annual Data | Quarterly Data
PERIOD ENDING
Net Income
31-Dec-08
31-Dec-07
31-Dec-06
1,147,800
1,017,400
777,700
366,600
331,800
Operating Activities, Cash Flows Provided By or Used In
Depreciation
387,600
Adjustments To Net Income
104,300
(71,400)
103,400
Changes In Accounts Receivables
(131,200)
(133,500)
(111,800)
Changes In Liabilities
29,400
115,000
63,100
Changes In Inventories
(180,200)
(89,900)
(86,800)
Changes In Other Operating Activities
(181,800)
(175,900)
(210,100)
Total Cash Flow From Operating Activities
1,175,900
1,028,300
867,300
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures
(155,200)
Investments
470,900
Other Cashflows from Investing Activities
Total Cash Flows From Investing Activities
(5,600)
310,100
(187,700)
(217,500)
(1,079,500)
(428,100)
89,000
(96,700)
(1,178,200)
(742,300)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
(135,600)
(89,700)
(44,600)
Sale Purchase of Stock
(949,900)
69,500
48,600
Net Borrowings
6,700
800
Other Cash Flows from Financing Activities
32,700
33,000
20,000
(1,046,100)
13,600
(203,200)
(29,300)
10,200
Total Cash Flows From Financing Activities
Effect Of Exchange Rate Changes
Change In Cash and Cash Equivalents
$410,600
($126,100)
(227,200)
3,600
($74,600)