Recently Pat McKeough replied to a question from a Member of his Inner Circleregarding a fast-growing medical stock. This U.S. firm makes a wide range of medical products and continues to expand its product line by means of acquisitions.
The company made its latest acquisition just two months ago, and Pat notes that Stryker Corp. is easily able to afford this purchase due to its high cash flow and low debt. Nonetheless, he adds, this heavy reliance on acquisition adds risk, and the company has had some quality control problems.
Q: Pat: I would like your opinion on Stryker Corporation. I do hold it, but am thinking of adding to it. Thank you.
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A: STRYKER CORP. (symbol SYK on New York; www.stryker.com) sells a range of medical products, including implants used in joint-replacement; surgical equipment; endoscopic devices (for looking inside the body); communications systems; patient-handling and emergency medical equipment; neurosurgical, neurovascular and spinal devices; and a range of other specialized medical gear.
The company has a history of using acquisitions to expand. Between 2012 and 2016, it spent $7.9 billion buying related firms.
Largely due to those new operations, Stryker’s revenue rose 30.8%, from $8.7 billion in 2012 to $11.3 billion in 2016.
However, its earnings fell 30.4%, from $3.39 a share (or a total of $1.3 billion) in 2012 to $1.34 a share (or $515 million) in 2014. That’s due to higher expenses related to the recall of certain products. Earnings then improved to $3.78 a share (or $1.4 billion) in 2015, and reached $4.35 a share (or $1.6 billion) in 2016. Stryker spends around 6% of its revenue on research.
In the quarter ended September 30, 2017, sales rose 6.1%, to $3.0 billion from $2.8 billion a year earlier. If you exclude the contribution of new businesses and exchange rates, sales improved 5.5% in the quarter.
If you exclude unusual items, earnings jumped 9.9%, to $578 million from $526 million. Due to slightly more shares outstanding, earnings per share gained 9.4%, to $1.52 from $1.39.
Growth stocks: U.S. approval for newly-acquired spinal implant expected soon
Stryker continues to use acquisitions to expand. In October 2017, it acquired 50.3% of VEXIM, a French company that makes spinal repair devices. Its main product is SpineJack, an expandable implant. Stryker expects regulators will approve SpineJack for sale in the U.S. in the next few months.
The company paid 183 million euros (about $212 million U.S.) for that stake. It plans to acquire the remaining shares in VEXIM by the end of 2017.
Stryker can easily afford this purchase. As of September 30, 2017, it held cash and investments of $2.7 billion. Its long-term debt of $6.6 billion is just 11% of its market cap.
The company expects to earn $6.45 to $6.50 a share for all of 2017. The stock, which has gained 39% in the past year, trades at 24.1 times the midpoint of that range. The $1.70 dividend yields 1.1%.
Uncertainty over the future of the U.S. Affordable Care Act (also known as Obamacare) adds risk to most medical products companies. Ongoing quality-control problems and costs related to product recalls are another risk factor for Stryker, in particular. Still, the company serves a growing market fuelled by the needs of aging baby boomers.
Inner Circle recommendation: Stryker Corporation is okay to hold.
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