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Challenges Remain for Stryker

NEW YORK ( TheStreet) -- Regardless of how logic-based an argument may be, readers will go to great lengths to undermine any bearish call on their favorite stock. While I wasn't overly negative towards Stryker (SYK - Get Report) following its July quarter, I wasn't buying the Street's excitement towards the stock, which in my opinion carried considerable risks, especially at its (then) 52-week high of around $71.

Since that article, shares of Stryker have fallen by as much as 6%. And while the stock has recovered from those losses, Stryker is nonetheless trading around the same level as when I last discussed it. And given that the company is still marred in legal battles due to product recalls for two of its artificial hip implants, my opinion regarding the risks have heightened not only because the company just installed a new CEO, but he must also now execute against some strong headwinds imposed by the Affordable Care Act.

While Stryker does have a decent lead in the orthopedic and medical technology market -- where it competes with (among others) Johnson & Johnson (JNJ) and Medtronic (MDT) -- I believe it's premature to assume that Stryker is out of the woods in its product-recall situation. Meanwhile, investors have already priced in a victory, given that the stock is up more than 30% year-to-date.

Thursday, the company will report its third-quarter results. I will be interested to hear how management addresses some of the growth challenges that lie ahead. The Street will be looking for earnings per share of $1, which would be a 3-cent improvement from the year-ago quarter. Revenue is expected at around $2.15 billion, less than 5% year-over-year growth. While that's not exactly a blowout quarter, it would still be a solid performance.

I'm also eager to hear the breakdown of Stryker's segmental performances, which has been (at best) "mixed" in the recent quarters. The company has done well in areas like orthopedics, which posted 7% year-over-year growth in the July quarter. But its MedSurg business has stagnated around 4% growth.

While it's encouraging that Stryker's hip and knee businesses are growing in mid single-digits, the company has done very little to differentiate itself from Johnson & Johnson and Abbott Labs (ABT), which carries significantly less investment risk. To that end, I don't believe investors can dispute the toll that the product recalls have begun to take on Stryker's performance. That the company posted only a 1% growth in instruments serves as an example.
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