Software, Tech IPO

Stryker Posts Solid Results as Recon Market Strengthens

SYK beat consensus revenue and EPS as it benefited from an improving orthopedic implant market and stronger MedSurg growth. SYK’s gross margin was weaker than we had expected though it was able to offset this with SG&A leverage. SYK is now excluding amortization from its adjusted EPS. While we now have estimates both including and excluding amortization in our model, we have (reluctantly) changed our published estimates (below) to exclude amortization. It’s worth nothing that while our EPS estimates have increased as a result, they have actually decreased slightly on an “apples-to-apples” basis. SYK’s valuation and subpar 2014 EPS growth keep us at a Hold rating.

Revenue was $2.468B (up 5.8% on an organic constant currency [CC] basis) vs. consensus of $2.440B and EPS was $1.23 vs. consensus of $1.22. For 2014, management guided to organic revenue growth of 4.5-6.0% CC and to EPS excluding amortization of $4.75-4.90. This implies EPS including amortization of $4.40-4.55 (vs. consensus of $4.57). We have raised our 2014E and 2015E revenue to $9.721B from $9.713B and to $10.167B from $10.159B, respectively. Given SYK’s move to exclude amortization, we have raised our 2014E and 2015E EPS to $4.84 (or $4.49 including amortization) from $4.51 and to $5.27 (or $4.92 including amortization) from $4.93, respectively.

SYK’s organic revenue growth was steady at 5.8% CC vs. 6.1% CC in 3Q13. Reconstructive growth slowed modestly to 8.0% CC from 9.2% CC in 3Q13. Hip and Knee growth improved while Trauma and Extremities slowed due to a difficult comp. MedSurg growth improved to 6.6% CC from 2.6% CC in 3Q13. Instruments and Endoscopy growth improved while Medical growth was steady. And Neurotechnology and Spine growth slowed 7.5% CC from 10.0% CC in 3Q13.

Gross margin of 66.3% was down 200 bps Y/Y due to the combined impacts of lower overhead absorption, an adverse mix, and currency movements. SYK was able to offset this with a 220 bps Y/Y decline in SG&A to 34.0% of sales as it slowed discretionary spending. R&D of 5.6% was up 10 bps Y/Y. And operating margin of 25.3% was flat Y/Y.