Stryker's ( SYK) flexible business strategy continues to pay off in a tough environment for the orthopedics group. The orthopedics device maker rose 3% late Thursday after posting solid second-quarter results. Earnings jumped 20% from a year ago to $214 million, or 52 cents a share, beating the Wall Street target by a penny. Sales climbed 9% from a yeer earlier to $1.33 billion, just shy of the $1.34 billion Thomson Financial analyst consensus estimate. But shares rose $1.30 in late action Thursday to $44.50 as investors applauded the Kalamazoo, Mich., company's consistency. Stryker's medical-surgical division, which sells hospital equipment, once again drove much of the company's growth. In that unit, sales jumped by a solid 15%, to the surprise of some analysts who had sensed a possible slowdown coming. At the same time, however, the company's orthopedics division posted a 6.6% growth rate that came in even lower than some people had anticipated. Nevertheless, Stryker sees better days ahead. "Excluding the effect of foreign currency exchange rates, the company expects annual net sales growth in the range of 11% to 13% in 2006," Stryker said in a press release Thursday. "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 implant products in the United States, Japan and certain other foreign markets." Stryker's booming med-surg business has been lifting results throughout a painful downturn in the orthopedics industry. Still, the company had been warning recently about slowing growth in its med-surg unit as well. As a result, Wall Street experts had scaled back their expectations for that division in advance. For example, JP Morgan analyst Michael Weinstein projected that the med-surg unit would increase second-quarter sales by just 11% -- down sharply from the 20% growth rate reported in recent years -- before new product launches help spark a rebound in the second half of 2006.
From the company's orthopedics division, Weinstein predicted a rerun of last quarter's results. He figured the entire unit would report sales growth of 9.4%, with spine sales coming in strongest and hip sales posting a below-market growth rate of just 3%. Importantly, he looked for implant pricing to come in flat due to ongoing pressures in the U.S. and recent cuts in Japan. Based on those assumptions, Weinstein predicted that Stryker would fall just short of revenue targets but still meet profit estimates. He also assumed -- quite accurately -- that the company would maintain its full-year guidance of $2.02 a share. For now, Weinstein remains somewhat cautious on the stock despite its shrinking premium to the market. Indeed, he worries about the orthopedics group as a whole, due to aggressive second-half growth targets and the risks posed by a sweeping industry probe by the Justice Department. Weinstein has a neutral rating on Stryker's stock. His firm counts the company among its investment banking clients. Meanwhile, BMO Capital Markets analyst Joanne Wuensch this week reiterated her own market-perform rating on Stryker's stock despite a possible upside surprise from the company. Wuensch predicted that Stryker's second-quarter results would come in just ahead of consensus estimates. However, she cited the escalating DOJ probe -- which brought a flurry of new subpoenas last month -- and ongoing pricing pressures as the real "hot topics" for the group. Wuensch's firm has provided non-investment banking business to Stryker over the past three months. A.G. Edwards analyst Jan Wald feels lukewarm toward the stock as well. To be fair, Wald recently expressed some optimism about a new product from the company -- OP-1 putty for spinal fusions -- but still needs some more positive catalysts before he can grow bullish on the stock.
"The catalysts that we are waiting for include earnings growth from new products and mix shift rather than cost cutting, U.S. approval of OP-1 and favorable industry pricing trends," Wald wrote late last month. Meanwhile, "we view the DOJ investigation as a long-term overhang for both Stryker and the orthopedic industry" as a whole. Prior to Stryker's earnings release, two other companies under investigation by the DOJ posted their own results. Johnson & Johnson ( JNJ), which operates DePuy Orthopedics, saw its joint-reconstruction business grow by just 4% in the latest quarter. The company admitted that its orthopedics business had "absolutely" slowed down in recent quarters as part of an industry-wide trend. The company then suggested that even last year's growth figures could have come in softer, if not for all of the arthritis patients who lost access to their COX-2 painkillers and sought relief through joint-replacement surgery instead. Because of that surgery boom, the company blamed tough comparisons -- along with "more challenging pricing" -- for the recent slowdown. It never discussed the DOJ probe at all. However, Biomet ( BMET) -- with its heavier dependence on orthopedic sales -- wound up having to talk. During its latest conference call, held just days after the last round of subpoenas went out, Biomet fielded some pressing questions about the investigation. Lehman Brothers analyst Bob Hopkins directed his inquiries at Daniel Hann, who currently serves as interim CEO but also has a legal background as head counsel for the company. "I'm getting questions that say, how can I get comfortable investing in the orthopedic space knowing that these Department of Justice investigations are going on and where they may lead," Hopkins pressed. "How would you respond to that as, formerly, the corporate attorney for Biomet? How should we be thinking about these investigations as it relates to investing in the orthopedic industry today?"
In the end, however, Hann simply portrayed the company's latest subpoena as a broad one focused on "price and bidding" in the industry. And he went on to note that such investigations can stretch out for quite some time. In the meantime, Hann -- who recently took over for founding CEO Dane Miller -- expressed optimism about the future direction of the company. "From where we sit, both the board and management, we're working together ... on a long-term strategic plan, and we're focused on running the business," he said. "The attitude -- the energy level here -- is very high, and we view change as a great opportunity for the company."