Stryker Continues on a Roll

OKLAHOMA CITY -- Stryker SYK delivered solid first-quarter results despite concerns about its core orthopedic device business.

The medical supply company's sales in the first quarter climbed 15% to $1.63 billion, in line with analyst estimates, while net income rose 19% to $291 million. Continuing an important trend, operating profits jumped an even stronger 20% to 70 cents a share. Analysts were expecting a penny less.

"We are pleased to report another strong quarter with double-digit sales growth and 20% growth in earnings from continuing operations," Stryker CEO Stephen MacMillan said on Thursday. "The ability to draw on a broad base of businesses continues to be important to our success."

Stryker reported double-digit sales growth for its orthopedic device unit and its medical-surgical division alike. Six of the company's U.S. franchises, including spine, instruments and medical supplies, led the way.

Looking ahead, Stryker expects that momentum to continue. The company expects 20% profit growth for the full year and its 2008 guidance, calling for earnings of $2.88 per share, was in line with the Street's estimate.

In after-hours trading Stryker's stock inched up 19 cents to $64.14 following the release of the report. However, the shares have been under serious pressure in recent months due to regulatory concerns.

Since early this year, investors have been fretting about two complaints from the U.S. Food and Drug Administration about manufacturing problems at a couple of plants.

Stryker has responded with a voluntary recall of its popular Trident hip cups and a pledge to remedy the situation. The company said it has tied a portion of its executive bonuses to successful resolution of the concerns.

Even so, some investors fear that a corporate-wide warning letter could be on the way. They have punished Stryker's shares, pushing them down 15% in recent months, as a result.

But UBS analyst Bruce Nudell feels the market overreacted. For starters, Nudell doubts that Stryker will receive a corporate-wide warning letter. But even if it does, he says, the resulting damage should be minimal.

Nudell alluded to a case involving Boston Scientific BSX, which fielded a similar letter. Based on the amount spent by Boston Scientific to remedy its problems, Nudell estimates Stryker faces possible upgrade bills totaling "less than $1 per share."

Stryker's stock has fallen 10 times that figure since the FDA concerns surfaced.

"Both direct and indirect value destruction appear small," concluded Nudell, who has a buy recommendation on Stryker's stock. "We believe the greater risk to Stryker's stock price comes from ongoing overhang due to concern the company will not be able to achieve expected annual EPS growth of 20%," as it has for many years.

Analysts were bracing for a temporary setback, at least. After all, Stryker had warned in advance that the recall would likely dampen its first-quarter hip sales. Even then, however, the company still promised to deliver its hallmark 20% earnings growth for the entire year.

As usual, Stryker is counting on its big medical-surgical division to help out. That unit, which sells everything from surgery scopes to hospital beds, prospers even when the orthopedic device business hits rough times. Stryker has fared better than some of its pure-play rivals, such as Zimmer ZMH, during orthopedic downturns as a result.

Soleil Securities analyst Elliott Schlang embraces that diversity. Schlang encourages investors to "gradually accumulate" Stryker's stock, which he values at $82 a share.