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) 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.

In fairness, I have to say that not all of these concerns are unique to Stryker. The Affordable Care Act, specifically the health insurance exchanges enacted by it, could have devastating impact on the company's growth performance. Not to mention the medical device excise tax that's going to cost the company about $100 million per year, or 20% of its annual budget spent on research and development.

Stryker has been fighting this tax, which it says stifles innovation. And management has argued the tax will unfairly burden Stryker as opposed to rivals like, say, Medtronic and Covidien ( COV), since Stryker has significantly more customers in the U.S. (about 65% of sales). In that regard, I would have to agree. But I don't believe that any exception (regardless of degree) will be fair.

The good news is that management appears to have a solid plan in place to capitalize on Medicare reimbursement, which is driven by (among other things) the level of satisfaction felt by hospital patients. Management insists that it has an advantage in its industry-leading hospital bed business, and the company feels that will enhance the hospital/patient relationship.

All told, given the highly competitive nature of this industry, I don't see an easy growth path for Stryker in the next 6 to 12 months. That doesn't mean the company can't overcome its headwinds. The question is to what extent any performance can support a higher share price from current levels. I just don't see it. To that end, I still think this stock is being too expensive given the risk factors at hand.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

If you liked this article you might like

Stocks Need to Move Lower to Be Able to Move Higher Again: Market Recon

Stocks Need to Move Lower to Be Able to Move Higher Again: Market Recon

11 Stocks Our Experts Love for November

11 Stocks Our Experts Love for November

Remember That Bumps in the Road Are Normal: Market Recon

Remember That Bumps in the Road Are Normal: Market Recon

Smith & Nephew Surges to Record High on Reports of Elliott Stake

Smith & Nephew Surges to Record High on Reports of Elliott Stake

These Stocks Are Ready to Reverse Course

These Stocks Are Ready to Reverse Course