This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Pricey Stryker Needs a Deal to Spur Healthy Growth

Stocks in this article: SYK STJ MDT JNJ COV ZMH SNN

NEW YORK (TheStreet) -- Medical device giant Stryker (SYK) has rewarded investors with year-to-date gains of close to 12%. On its own, that's not a breathtaking number. But when compared to the 7% gain of the medical devices sector, according to Morningstar, it's tough to complain.

It's also tough to argue against how expensive these shares have gotten. Currently, they trade around $83.50.

This now pushes Stryker's price to price-to-earnings ratio past 41. That's 13 points higher than the industry average P/E of 28, according to Yahoo! Finance.

Read More: Warren Buffett's Top 10 Dividend Stocks

Investors can have both St. Jude Medical (STJ) and Medtronic (MDT) at much cheaper multiples of 25 and 21, respectively. St. Jude and Medtronic both outperform Stryker in gross margin and operating margin.

While the company has done a decent job addressing a wider range of markets within medical technology, the company reconstructive business continues to struggle, growing just 2.5% in the most recent quarter and trailing the likes of Johnson & Johnson (JNJ) , up 3%, and Biomet, which reported 4% in its most recent report before its pending acquisition.

Johnson & Johnson trades at a P/E that is 22 points lower and pays a 2.80% dividend compared to a 1.50% yield for Stryker. Even if we were to use the "investors are paying for growth" argument, Stryker would still be at a deficit to Johnson & Johnson, which is growing a 9% rate compared to 7% for Stryker.

So where's the value?

At a P/E that almost doubles the industry rate, Stryker should -- at least -- post double-digit revenue growth. To that end, it makes sense for Stryker to seek growth through a merger or an outright acquisition. It's one of the ways that companies with tons of cash but short on growth can have instant access new revenue and markets that would have taken years to build.

Read More: Warren Buffett's Top 10 Dividend Stocks

Medtronic's $42.9 billion deal for Covidien (COV) is one of several recent examples of med-tech M&A that has occurred as companies look to grow and, in some cases, diversify their offerings. Zimmer Holdings (ZMH) wasted no time buying orthopedic device maker Biomet for $13 billion.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,568.11 +211.24 1.22%
S&P 500 2,034.67 +21.78 1.08%
NASDAQ 4,700.8980 +56.5860 1.22%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs