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Stryker (SYK) Beats on Q1 Earnings & Sales; FY16 View Up

Stryker Corp SYK reported strong first-quarter 2016 earnings results driven by continued new product launches, strong sales and marketing execution. Adjusted earnings of $1.24 per share comfortably beat the Zacks Consensus Estimate by 4 cents and improved 11.7% from the year-ago quarter.
 

 

The upside was primarily driven by higher sales, which increased 4.9% to almost $2.50 billion and outpaced the Zacks Consensus Estimate of $2.47 billion.

At constant currency (cc), net sales improved 6.1% (all organic) from the year-ago quarter, driven by improving volume (up 7.5%) and partially offset by pricing headwinds (down 1.4%). A strong U.S. dollar impacted overall sales by 1.3% in the quarter.

Segment Details

U.S. sales were up 8.9% year over year to $1.82 billion, driven by growth across all segments. International sales fell 4.6% (up 0.4% at constant currency) on a year-over-year basis to $673 million, primarily due to tough comparisons in the emerging markets, particularly in China.

Stryker expects challenges in the emerging markets to wane in the back half of 2016. Management expects good performance in Europe, Japan, and Australia.

Orthopedic sales increased 3.3% (up 4.6% at cc) to $1.06 billion, driven by a 4.6% rise in Trauma & Extremities sales and 0.4% in other sales. Knees sales inched up 4.4% while Hips sales increased 1.2%. Growth in Trauma & Extremities reflected double-digit organic growth at the U.S. foot and ankle business.

Sales growth was driven by strong performance of Triathlon products, driven by Tritanium revision cones, cementless knee products, as well as new customer adoption of the MAKO platform.

Stryker sold 7 MAKO robots during the quarter globally. The company noted that the order trend is encouraging, driven by the expanded indications and planned launch of the Total Knee system (expected full-year 2017). Robust procedure growth in both partial knees and hips using MAKO was also encouraging.

MedSurg sales increased 3.4% (up 4.6% at cc) year over year to $958 million. Medical, Endoscopy, Instruments and Sustainability sales improved 0.6%, 2.5%, 5.6% and 6%, respectively.

Neurotechnology and Spine segment sales increased 12% (up 13.1% at cc) to $480 million, primarily owing to a 19.5% surge in Neurotechnology sales, which include neurovascular, CMF and NSE. Spine sales increased 1.1% on a year-over-year basis in the reported quarter.

Stryker completed acquisitions of both Sage and Physio-Control in the quarter. For 2017, the company expects the buyouts of Sage Products and Physio-Control to prove accretive to earnings by 15–18 cents.

Margins

Adjusted gross margin expanded 240 basis points (bps) to 68%, primarily driven by favorable mix, foreign exchange rate and two-year suspension of medical device tax.

Research and development (R&D) expenses, as a percentage of sales, increased 10 bps to 6.4%.

On the other hand, adjusted selling, general and administrative (SG&A) expenses rose 150 bps to 37.4%, primarily due to increased selling activity, anticipated spending related to new ERP deployment efforts and reinvestment of the medical device tax.

Adjusted operating margin expanded 90 bps on a year-over-year basis to 24.2%, on the back of strong top-line growth, favorable mix and higher gross margin, partially offset by higher SG&A expenses.

Liquidity

Stryker exited first-quarter 2016 with cash and cash equivalents of $6.98 billion as compared with $3.38 billion at the end of fourth-quarter 2015. Long-term debt (excluding current maturities) was $6.71 billion as compared with $3.23 billion. Stryker announced that it has suspended share repurchase for the rest of 2016.

Outlook

For the second quarter of 2016, Stryker expects adjusted earnings in the range of $1.33 to $1.38 per share. Unfavorable foreign exchange rate is expected to impact earnings by 3 cents.

Stryker expects organic sales growth of 5.5% to 6.5% (up from earlier guided range of 5% to 6%) for full-year 2016. Unfavorable foreign exchange is expected to hurt sales by about 1% and have a negative impact of 10–12 cents in full-year 2016.

Our Take

We believe Stryker’s innovative product pipeline will be a key growth catalyst. Growing adoption of MAKO will drive sales in the orthopedic and reconstructive surgery market. The company’s back-to-back acquisitions of Physio-Control International, Synergetics USA and Sage Products LLC are expected to drive overall growth.

Further, these deals allow the company to foray into new markets. However, pricing pressure will continue to hurt sales in the near term.

Zacks Rank and Key Picks

Currently, Stryker carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical sector are AtriCure ATRC, Align Technology ALGN and PAREXEL International PRXL. All the stocks sport a Zacks Rank #1 (Strong Buy).

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