NEW YORK (TheStreet) -- It wasn't that long ago when the major concern about Stryker (SYK - Get Report) was whether the company had enough legal expertise to navigate issues related to the company's artificial hip implants. They were considered faulty and had made it to the recall list.
As a consequence, the Street turned sour on Stryker's stock. And these shares began trading at a noticeable discount to fair value. Investors questioned whether the stock was worth the trouble. After a recent change in management, growth is starting to pick up in areas like joint reconstruction. With shares now at 52-week highs on strong margin improvements, I can't say Stryker is a bargain today. It's hard nonetheless to bet against a company with momentum now firmly on its side.
With fourth-quarter revenue climbing more than 5% year over year, Stryker ended the 2013 campaign on a strong note. Although growth has returned to the entire industry, on an organic basis, Stryker's 6% results stood out pretty firmly from other well-run medtech companies like Medtronic (MDT - Get Report) and Covidien (COV).
Growth was led by the Reconstructive business, which advanced 8% year over year. There were concerns that the company had begun to cede market share to Johnson & Johnson (JNJ - Get Report) due to product recalls. But management found ways to grow 8% in that all-important hip category. This is while revenue in knees grew almost 5%.
It's true that the company didn't outperform Johnson & Johnson, which grew knees by 8%. But Johnson & Johnson has not had these sorts of deficits to work with. Nor should investors have expected Stryker to post numbers anywhere near what the company actually produced. Investors shouldn't dismiss the solid 12% growth in the trauma and extremities segment, either.
Medical instruments posted more than 7% growth. As much as I've followed Stryker over the past several quarters, I have to say that this was by far an unexpected occurrence. On a relative basis, the company had not shown any signs of strength in instruments for some time. And there were concerns that, among others, Covidien (which had begun to apply pricing pressure) was beginning to steal market share. But there was no evidence of that in the earnings report.
Without further evidence, I'm not ready to say that Stryker is suddenly dominating the markets in instruments. But the results I've seen from Covidien and Johnson & Johnson do support the notion that there has been a broad recovery within the entire industry.
Last but not least, investors have to be encouraged by the 7% growth in the medical and surgical products division. This is an area that has long been considered the weak link among all of Stryker's businesses. And even with the relatively weak 5% growth in neurotechnology, the company more than made up for this by doubling the output in spine, which produced 10% growth.
In that regard, with each of the segments performing so well, the challenge now is for Stryker's management to figure out ways to differentiate the company's offerings from those of, say, Abbott Labs (ABT - Get Report). And I don't believe it makes sense at this point to nitpick about underperforming areas, especially when there were concerns that endoscopy and medical devices would be stagnant. And it's also worth noting that even with the soft growth in neurotechnology, Stryker still outgrew Covidien. It's not farfetched to say that the company has stolen market share.
The way I see it, despite the strong odds, management continues to do enough to put most (if not all) of the company's past concerns to rest. Not to mention, the company must also adjust to performance-impacting law changes imposed by the Affordable Care Act, a.k.a. Obamacare.
If there were any real concerns this quarter, it's on the operating side. Margins did take a step backwards, falling 2% and missing estimates. But much of this was due to the sales mix and currency exchange rates. Plus, I'm willing to excuse this miss given that management was able to cut spending to help spur profits 5% higher.
As I've said, with the stock already at a 52-week high, there are better bargains out there. But that's not to suggest Stryker can't continue to offer above-average long-term gains. There's still value to be extracted from the MAKO deal, and I believe management's new vision has begun to change the culture of the company.
In short, I'm projecting this stock to reach $90 per share on the basis of 6% free cash flow growth.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.