Stryker Corp. (NYSE: SYK). We see the planned increase in product development spending in 4Q20 as a sign of management’s confidence in the company’s prospects. Elective surgery volume is now rising, reversing the sharp declines of April and early May, and Stryker’s sales improved sequentially in 3Q20. The Mako robotics system for orthopedic surgery is also gaining share among freestanding surgery centers and competitive accounts. We expect solid growth going forward in the company’s Orthopedics, MedSurg, and Neurotechnology businesses.
Stryker plans to increase spending in 4Q20 on new hiring and product development, which we view as a sign of management’s confidence in the sustainability of the recovery. Stryker’s third-quarter sales grew 4.2% (3.3% organic), a strong sequential reversal from the organic decline of 24.0% in 2Q20, helped by the recovery in elective surgery volume. While management did not restore its full-year guidance, it did provide upbeat comments about the fourth quarter and 2021. Stryker is moving toward year-end with a robust flow of new orders for the Mako robotics system, and looks for record system placements in 4Q. It also expects to benefit from the recently completed Wright Medical acquisition.
Organic sales exclude acquisitions/divestitures and the impact of foreign exchange.
By segment, orthopedics sales grew 3.8% organically to $1.317 billion. MedSurg sales grew 2.9% to $1.6 billion. In Neurotechnology and Spine, sales grew 5.5% to $820 million. Notably, U.S. orthopedic sales grew 7.5%. The strong results in orthopedics demonstrate the power of the Mako platform to drive sales of hip and knee implants.
The upper extremities (shoulder, elbow, wrist, and hand), lower extremities (foot and ankle) and biologics segments are among the fastest-growing areas in orthopedics. Wright also brings to Stryker its technology for advanced preoperative planning.
We think that Stryker will be more active in M&A in 2021.
EARNINGS & GROWTH ANALYSIS
While the company did not reinstate financial guidance for 2020, its upbeat comments on the 3Q20 earnings call point to a more optimistic outlook, which should be helped by contributions from Wright Medical.
FINANCIAL STRENGTH & DIVIDEND
The company is generating strong cash flow from operations.
Stryker pays an annualized dividend of $2.30 for a yield of about 1.0%. Our dividend estimates are $2.30 for 2020 and $2.42 for 2021. RISKS Stryker faces risks as its operations are affected by the COVID-19 pandemic. It is containing costs in its orthopedics business while ramping up production of medical products to address hospitals’ coronavirus needs.
It also faces pricing pressure from budget-constrained hospitals, as well as regulatory risks. Some hospitals are financially strapped due to high COVID-19 costs.
Stryker also faces regulatory risk. Prior to marketing, Stryker’s products must be approved by the FDA or the relevant agencies in overseas markets.
The MedSurg Equipment segment sells powered surgical instruments, surgical navigation systems, endoscopic products, medical video imaging equipment, and hospital beds and patient-handling systems. The Neurotechnology unit includes the neurovascular business as well as the interventional spine and spinal implants business.
SYK trades at 25.0-times. We believe the premium is warranted given the company’s solid growth prospects in its Orthopedics, MedSurg and Neurotechnology businesses. We expect stronger growth as the pandemic recedes and hospitals resume elective procedures. We also see the Mako robotic surgical system as a clear differentiator in orthopedic surgery and as a means for Stryker to gain market share among surgeons.
On November 18 at midday, BUY-rated SYK traded at $234.33, up $2.89.