On August 6, 2023, Stryker Corp (SYK, Financial) experienced a daily gain of 2.94%, with an Earnings Per Share (EPS) of 7.08. But the question that arises is: Is Stryker Corp (SYK) fairly valued? This article presents an extensive valuation analysis to answer this question. We invite you to continue reading for a deeper understanding of Stryker's financial position.
Stryker Corp (SYK, Financial) designs, manufactures, and markets a wide range of medical equipment, instruments, consumable supplies, and implantable devices. Its product portfolio includes hip and knee replacements, endoscopy systems, operating room equipment, embolic coils, hospital beds and gurneys, and spinal devices. Stryker is one of the three largest competitors in reconstructive orthopedic implants and holds the leadership position in operating room equipment. The company generates over a quarter of its total revenue from outside the United States.
Currently, Stryker's stock price stands at $283.71, while its GF Value, an estimation of fair value, is $294.49. This hints at a fair valuation, but a more profound exploration is required for a conclusive assessment.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
According to GuruFocus' valuation method, Stryker (SYK, Financial) is believed to be fairly valued. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns.
Given that Stryker is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Assessing Stryker's Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before investing. Key indicators of financial strength, such as the cash-to-debt ratio and interest coverage, can provide valuable insights. Stryker has a cash-to-debt ratio of 0.14, which ranks worse than 90.51% of companies in the Medical Devices & Instruments industry. The overall financial strength of Stryker is 5 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. Stryker has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $19.5 billion and Earnings Per Share (EPS) of $7.08. Its operating margin is 17.5%, which ranks better than 78.88% of companies in the Medical Devices & Instruments industry. Overall, GuruFocus ranks the profitability of Stryker at 9 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Stryker is 7.2%, which ranks better than 50.07% of companies in the Medical Devices & Instruments industry. However, the 3-year average EBITDA growth is 2.9%, which ranks worse than 59.61% of companies in the same industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) is another way to assess its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the ROIC should be higher than the WACC. For the past 12 months, Stryker's ROIC is 9.42, and its WACC is 8.69.
In conclusion, Stryker Corp (SYK, Financial) appears to be fairly valued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 59.61% of companies in the Medical Devices & Instruments industry. To learn more about Stryker stock, you can check out its 30-Year Financials here.
For high-quality companies that may deliver above-average returns, consider checking out the GuruFocus High Quality Low Capex Screener.