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Stryker Quarter Not Good Enough

A solid performance can't fend off a mild postclose selloff.


(SYK) - Get Stryker Corporation Report

performed well in the first quarter of the year.

The medical device maker beat first-quarter financial targets, making 59 cents a share on revenue of $1.49 billion. Only Stryker's physical therapy unit, the smallest of its three core businesses, weathered a downturn. Sales there fell by 4.8% in the latest period.

The company also guided in line for the full year, though shares dropped 1% in after-hours trading to $68 and change.

"Our U.S. orthopedic implant franchises delivered another strong quarter, up 14% collectively, leading us to a strong start in 2007," Stryker CEO Stephen MacMillan stated. "Our MedSurg franchises also had a very good quarter, especially in international markets."

The company promised to grow full-year earnings by 20% to $2.42 a share -- matching current expectations -- even while admitting that industry challenges remain.

"The company's outlook for 2007 continues to be optimistic regarding underlying rates in orthopedic procedures and the company's broadly based range of products in orthopedics and other medical specialties," Stryker stated, "despite the potential for continued pricing pressure in certain markets."

Those pressures have hammered orthopedic stocks in recent years. However, the group has been posting a strong rebound as hopes for a sector recovery -- and a return to the group's glory days -- continue to rise.

Wall Street experts assumed that Stryker would hit its quarterly targets.

Some, like BMO Capital Markets analysts Joanne Wuensch, figured that the company would do even better. Wuensch looked for the company to top both revenue and profit estimates for the latest period. She felt that improvements in orthopedic implant sales, especially when compared with last year's weak results, should help out.

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"We reiterate our outperform rating on Stryker shares," Wuensch wrote ahead of the company's quarterly update, "believing that the stock will benefit from the stabilization of the orthopedic industry as well as the company's diversified product platform."

Wuensch has a $75 price target on Stryker's stock. Her firm has noninvestment banking ties to the company.

Despite a decline Wednesday, shares are hovering very near their all-time high.

Stryker's stock has already rocketed past the targets set by some other Wall Street experts. Leerink Swann analyst Jason Wittes values the shares at just $55 to $56 apiece, given his ongoing concerns about the industry.

"The company has the least financial risk of the orthopedic group, in our view, given its diversity and focus on financial management," Wittes conceded on Tuesday. However, "due to an increasingly difficult pricing and mix environment, we anticipate further multiple compression -- particularly as the valuation gap has widened between its peers."

Still, even Wittes looked for a relatively in-line quarter from the company. He predicted that the company would fall a bit short on the top line, despite an expected boost from foreign currency benefits, but assumed that it would hit bottom-line targets nonetheless.

Wittes has a market-perform rating on Stryker's shares. A division of his firm provides consulting services to companies in the healthcare industry.

Meanwhile, going forward, some help could be on the way. Last week, Bear Stearns analyst Milton Hsu noted, Medicare signaled payment increases for certain orthopedic surgeries -- including sizable ones for complicated cases -- that provide a "net positive" for the industry.

Yet Hsu seemed to downplay this development in the end.

"Despite the concerns that

Medicare reimbursement changes continue to generate, we continue to believe surgeon preference, innovation and private insurance play a more significant role in implant pricing," he explained on Monday. Ultimately, he added, Medicare reimbursement "is weakly correlated with implant pricing trends."

Even so, Hsu has an outperform rating on Stryker's shares. His firm has noninvestment banking ties to the company.