Stryker Corp. (SYK, Financial) is in the right place with the right portfolio of products and the right strategy to continue its winning streak on Wall Street.
The place is the fast-growing medical technology industry, which has helped the company achieve a compound annual growth rate of 16.2% in net sales over the 40-year period; and 9.4% in the last three years.
| Company | SYK | ZBH |
| 3-year Revenue Growth (%) | 9.4 | 0.6 |
| 3-year EBITDA Growth (%) | 8.4 | 5.3 |
| Current Operating Margin (%) | 17.07 | 11.25 |
| Average Annual Total Return (2010-20) | 16.41 | 11.41 |
| Market Price | $237 | $149.52 |
| Intrinsic Value | $192.20 | $107.99 |
| Company | ROIC | WACC | ROIC-WACC (Economic profit) |
| SYK | 8.56 | 5.92 | 2.64 |
| ZBH | 5.47% | 7.72% | -2.25% |
The time is now, the middle of the massive aging of the baby boomer generation, which is expected to last for years. This is a worldwide trend that began around 2005, as the first baby boomer cohort crossed 60. For the period 2000 to 2011, the U.S. population over the age of 65 rose by 18%, a rate that is expected to continue for another 20 years.
Meanwhile, legislation like the Affordable Care Act in the U.S. makes health insurance available to more people.
Both factors are a strong tailwind for the medical technology industry as the elderly population uses more health care resources than younger generations, like orthopedics, surgery, neurotechnology and spinal products, which are at the core of Stryker's value proposition.
These products are sold to doctors, hospitals and other health care providers, where value creation requires cost-effectiveness and innovation to deliver superior patient treatment.
That's where Stryker's strategy comes into play. Thanks to a string of acquisitions, the company has managed to achieve both the scale and innovation to help these organizations achieve this goal.
Back in 2013, for instance, Stryker acquired Mako Surgical and its robotic onteractive orthopedic system. RIO provides robot-guided support to surgeons in joint replacements to minimize damage to the host bone and significantly improve patient outcomes.
Working together with health providers to improve patient outcomes is consistent with the company's mission, which states that "together with our customers, we are driven to make healthcare better."
Meanwhile, forging close relations with health care providers creates a moat around the company. It allows Stryker to achieve a sustainable competitive advantage, as evidenced by a positive economic profit over the last decade.
Wall Street has taken notice, helping Stryker deliver a 16.41% total annual return for its stockholders over the last decade, beating close competitor Zimmer Biomet Holdings (ZBH, Financial) by a wide margin.
But Wall Street may have run too far too fast for discounting the company's prospects.
Stryker's shares, currently at $237, trade well above their intrinsic value of $192.20.
These valuations give investors no margin of error if Stryker's performance falls short of expectations in the short term.
In the long term, demographics are favorable for the medical technology industry, and Stryker has the right products, the right relations and the right strategy to continue its winning streak.
Disclosure: I own shares of Stryker and Zimmer Biomet Holdings.
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