Stryker: A 5-Star Investment in Orthopedics

03/27/2020 5:00 am EST


Kevin Huang

Senior Analyst, Equity Research, CFRA, Equity and Fund Research

Our latest focus stock is Stryker Corporation (SYK), a leading medical devices company which carries CFRA's highest recommendation of 5-STARS, or Strong Buy, explains Kevin Huang, a leading analyst with CFRA Research.

We view Stryker favorably because it is a large, diversified supplier of reputable medical devices and supplies, making it a preferred vendor for the hospital industry, which has been consolidating in recent years.

In the long run, we think that the company can maintain a low-double digit earnings growth rate because of its operational discipline, experience with M&A integration, and strong competitive position in orthopedic robotics.

As of December 31, 2019, SYK's capital structure was sound, with a net debt to total capital ratio of 29% and a leverage ratio (net debt to trailing EBITDA) of 1.7x.

We view SYK's orthopedics business as an area of strength and opportunity because of SYK's MAKO robotic offering. SYK's MAKO robotic orthopedic system first received FDA approval in 2008 for partial knee arthroplasty procedures.

The MAKO system expanded to include partial hip, total hip and total knee arthroplasty (i.e. TKA) by 2015. As a result, SYK has had plenty of time to gather data on robot-assisted knee procedures and to gain the acceptance of orthopedic surgeons.

SYK's early foray into the robotic orthopedic market has allowed the company to establish a dominant reputation and position that will be difficult for competing products of equal or lesser value to overcome, by our analysis.

We anticipate that the continued competitive strength of SYK's MAKO robots will continue to drive share gains for SYK in the traditionally stable knee and hip replacement markets.

In 2019, approximately 55%-60% of Mako placements were in competitive accounts, up from 40%-50% in 2018. We think the company's recent success will enable it to further expand its presence into other types of robotic orthopedic surgery (e.g. shoulder).

In addition, the success of MAKO has likely and will likely continue to lead to crosssales of SYK's non-orthopedic products because hospitals prefer to limit the number of vendors that they purchase from, in our opinion.

We recently lifted our opinion on shares of SYK to Strong Buy from Buy because we think that shares have been oversold in response to Covid-19 concerns.

While we expect Covid-19 to negatively impact elective procedure volumes in 2020 and hence SYK's sales, we don't think the impact of Covid-19 to long-term share values is as substantial as the recent decline in shares has been.

Our 12-month target price of $234 reflects a multiple of 26x our next-12-month EPS estimate of $9.00. Risks to our recommendation and target include pricing pressure, intensified competition, and weaker-than expected medical procedure volumes.

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