fans brightened visibly after the joint-implant company's latest earnings report.
Shares in the Kalamazoo, Mich., company rose 3% late Thursday after it beat first-quarter earnings targets. Stryker made 49 cents a share for the quarter. Sales rose 10% from a year ago to $1.32 billion, just shy of the $1.33 billion Thomson Financial estimate.
Stryker is projecting a full-year profit of $2.02 a share, in line with the $2.03 analyst consensus estimate. And the company is clearly looking on the bright side.
"The company's outlook for 2006 continues to be optimistic regarding underlying growth rates in orthopedic procedures and the company's broadly based range of products in orthopedics and other medical specialties despite the potential for increased pricing pressure on orthopedic implants products in the United States, Japan and other foreign markets," the company said Thursday. "The (2006) projection represents a 21% increase" over operating profits last year.
Stryker must increase sales by 12% to 15% on a constant-currency basis in order to hit its targets. The company grew sales at the low end of that range in the recent quarter.
Sales of orthopedic implants rose just 7.1%, or 11% constant-currency, in the latest period. Sales of medical and surgical products increased at a much faster clip, however.
Investors, rattled by disappointments in the past, seemed to breathe a sigh of relief. They pushed the company's stock up 2.4% to $44.85 following the report.
Bear Stearns analyst Milton Hsu pegged the results ahead of time.
Last week, Hsu predicted that Stryker would come up just shy of revenue projections for the quarter, with negative currency and flat pricing pressuring results. Due to operating efficiencies, however, he expected the company to beat earnings expectations by a penny.
Hsu was banking on another strong quarter from Stryker's medical-surgical business but mixed results from the company's larger orthopedics division. There, he expected double-digit growth in both spine and knee sales. However, he was looking for very modest sales growth -- of less than 2% -- from the hip division.
All told, Hsu assumed that Stryker would grow companywide sales by more than 10% but orthopedic sales at a slower rate.
Hsu has come to favor Stryker over the company's closest competitors due, in large part, to its smaller exposure to the challenging orthopedics business. He believes that orthopedics pricing has stabilized, for now, at flat to negative 1% in the crucial U.S. market. However, he feels that prices could remain under pressure -- with no increases in 2006 -- for some time to come.
He expects most orthopedic stocks to remain pressured as well.
"Against the current industry backdrop, we believe sales and/or EPS outperformance during 1Q06 will not likely be enough to alleviate concerns about the industry going forward," Hsu stated last week. "Macro factors, rather than company-specific issues and product launches, may continue to be the most significant factor impacting the ortho stocks."
Of all the orthopedic players, Hsu recommends buying only Stryker, because the company is more diversified than most.
Smith & Nephew
will release their own first-quarter results next week.
Hsu expects Zimmer to increase revenues by 6% and earnings by twice that much, in-line with Wall Street expectations. Still, his forecast calls for Zimmer to grow both hips and knees at below-market rates despite the company's many new offerings.
"New products launched (by Zimmer at a recent industry conference) were abundant," Hsu points out. But "are any of these significant enough to drive market-share gains or favorable mix?"
Of course, Hsu seems to make the same point about the industry as a whole.
"Innovation, which has contributed meaningfully to recon growth since '00, appears to be in a relative holding pattern for now," he notes. "There have been no significant new product launches which would have resulted in a significant improvement in mix shift. ... There do not appear to be any significant positive catalysts which could drive the ortho stocks higher over the short term."
Going forward, however, Smith & Nephew plans to introduce a major new development to the U.S. market. The company hopes to win regulatory approval of its hip resurfacing system in the near future.
Meanwhile, Hsu believes, Smith & Nephew has already been growing hip and knee sales faster than most. He expects the company to beat first-quarter profit estimates by a penny at least.
Hsu has peer-perform ratings on both Zimmer and Smith & Nephew. His firm does and seeks to do business with the companies it covers.