Medical device companies are gradually seeing a rebound in their business as fewer elective medical visits, procedures and surgeries are being delayed due to Covid-19.
Stryker Corporation (SYK, Financial) is an excellent company within this domain that has seen a solid recovery. Its stock price has also seen an excellent runup over the past few months, but Stryker’s product portfolio has grown enormously over the years, both organically as well as through acquisitions. The company weathered the Covid-19 pandemic and had a rare year with a dip in revenues, but its performance in 2021 has been truly stellar. Let us dive deeper into its recent developments in order to analyze if the company is still a good buy for new investors given the high price tag.
Stryker Corporation is one of the leading large-cap medical device companies. The company was founded in 1941 and has its products distributed across nearly 75 different countries through its network of subsidiaries and branches, as well as third-party dealers and distributors. It is headquartered in Kalamazoo, Michigan. It operates through three business units: Orthopaedics, MedSurg and Neurotechnology/Spine.
Orthopaedics includes implants for the replacement of the knee as well as hip joints and devices along with the latest technologies for operations. More than a third of Stryker's revenue comes from its Orthopaedics segment. The company has been ramping up elective procedures, especially in trauma, knees and extremities.
MedSurg, the largest segment of Stryker, includes sub-segments like surgical equipment and navigation systems, emergency medical equipment and disposables, endoscopy and communication systems and remanufactured medical devices. It contributes more than 40% of revenues for the company.
Neurotechnology/Spine, the company’s smallest segment, offers neurovascular and neurosurgical products as well as spinal implants.
Recovery In surgical volumes
Over and above the impact of acquisitions in two of Stryker's segments, Orthopaedics and Neurotechnology/Spine, the company delivered outstanding organic revenue growth in the second quarter of 2021.
Stryker reported a top-line of $4.29 billion for the quarter ended June 30, which implies 55.35% growth as compared to the $2.76 billion in revenue reported in the corresponding quarter of the previous year. The company beat the analyst consensus estimate of $4.14 billion.
It generated 9.3% of organic growth in Q2 2021 as compared to Q2 2019 because of the rebound in the surgical volumes and new product launches. This rebound is best demonstrated by the fact that surgical volumes in May 2021 were down just 2% as compared to the same period in 2019, showing that more patients have re-entered the health care system following a Covid-related pause in many elective treatments last year. As a matter of fact, about $2.76 billion of Stryker’s revenues in the quarter were only from Covid-induced delays of elective procedures like hip and knee replacements.
These revenues translated into a gross margin of 65.95% and an operating margin of 21.94%, which was higher than that in the same quarter of last year.
Stryker’s net income came in at $592 million, and its adjusted earnings per share (EPS) of $2.25 outperformed the analyst consensus estimate of $2.14.
In terms of cash flows, Stryker reported $878 million in the form of operating cash flows and spent $202 million in investing activities during the previous quarter. The company produced higher cash flows as compared to the same period in the previous year.
Recent product launches
Since August 2020, Stryker has launched five new products that positively impacted their organic revenue growth in recent quarters. Their newly launched products include the Tornier Perform Humeral Stem, the T7 personal protection system, the Mako Total Hip 4.0, the ProCuity wireless hospital bed and the Surpass Evolve Flow Diverter.
Tornier Perform Humeral Stem offers excellent clinical solutions for the most complex and straightforward arthroplasty procedures, which is why it could become a strong preference among the surgeon community.
Some of the other strong growth drivers are Mako (the company’s robotic arm-assisted surgery technology), neurovascular offerings, emergency care, sports medicine and their U.S.-based shoulder and complete ankle products.
Following pandemic challenges, the company is already witnessing strong momentum rebound in the U.S. Neurovascular business, which has had significant growth in all products, including hemorrhagic flow and diversion. Internationally, the company’s neurotechnology and spine-related offerings are already growing by more than 20%, driven by strong demand in China and other emerging markets, along with Australia and Europe. Taking all these factors into account, it is likely that the company is set for a solid couple of quarters and perhaps even years ahead.
Despite a revenue dip in 2020, Stryker’s stock price has shown a phenomenal recovery, and the stock has grown significantly in the past year. The company expects to see a rebound in elective procedures as both knees and hips are seeing a consistent quarter-over-quarter sequential improvement. Also, the company is investing strongly in R&D to improve its long-term product portfolio, harmonize design processes and build a strong pipeline.
This is why the current enterprise-value-to-revenue multiple of 6.35 and the current price-earnings ratio of 49.58 seem high but not too pricey, in my view. Stryker should be able to cash in on the considerable backlog of postponed elective surgeries as well as its product launches. Overall, given its current price levels, I believe that a buy-on-dips strategy is ideal for a stock like Stryker.