Ticker: SYK STRYKER CORP. (SYK)
Sector: Healthcare
Industry: Medical Instruments
& Supplies Company Profile
Stryker Corporation engages in the development,
manufacture, and marketing of orthopedic products and medical
specialties in the United States. It operates in two segments,
Recommendation: BUY Orthopedic Implants and MedSurg Equipment. The Orthopedic
(500 shares) Implants segment sells orthopedic reconstructive, trauma,
spinal, and craniomaxillofacial implant systems, trauma implant
systems, joint replacement products, knee implant systems, hip
Pricing implant systems, bone cement, and the bone growth factor OP-1
Closing Price $70.04 (11/09/07) products. The MedSurg Equipment segment offers surgical
52-wk High $74.67 (10/11/07) equipment; surgical navigation systems; endoscopic,
52-wk Low $50.15 (11/10/06) communications, and digital imaging systems; and patient
handling and emergency medical equipment. The company also
Stop-Loss $55.00 (recomm.)
provides physical, occupational, and speech therapy services to
patients recovering from orthopedic or neurological illness and
Market Data injury. Stryker sells its products through local dealers and direct
Market Cap $28.71B sales force to hospitals, health-care facilities, and doctors. It also
Total assets $5.87B has operations in Europe and Japan, as well as in the Pacific
Trading vol 1.34M (3mon avg) region, Canada, Latin America, and the Middle East. The
company was founded in 1941 and is headquartered in
Kalamazoo, Michigan.
Valuation About two-thirds of its sales come from the domestic
EPS (ttm) $2.33 market and one-third from the international market. This gives
P/E (ttm) 30.06
Stryker Corp. good international exposure.
PEG 1.56
Div Yield 0.30% Sales
Profitability & Effectiveness (ttm)
ROA 13.04%
ROE 20.62% 34%
Profit Margin 16.15% Domestic
Oper Margin 21.31% International
66%
ANALYST NAME
Varun Chikhliwala
vjckv6@mizzou.edu
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Product Line
Orthopedics1
Orthopedic implants consist of products such as hip, knee, shoulder and spinal implants,
associated implant instrumentation, trauma-related products, and bone cement. Artificial joints
are made of cobalt chromium, titanium alloys, ceramics, or ultra-high molecular weight
polyethylene, and are implanted in patients whose natural joints have been damaged by arthritis,
osteoporosis, other diseases, or injury. SYK also sells trauma-related products, used primarily in
the fixation of fractures resulting from sudden injury, including internal fixation devices such as
nails, plates and screws, and external fixation devices such as pins, wires and connection bars. In
addition, the division sells Simplex bone cement, a material used to secure cemented implants to
bone, and the OP-1 Bone Growth Device. Composed of recombinant human osteogenic protein-1
and a bioresorbable collagen matrix, the product induces the formation of new bone when
implanted into existing bone, and is approved to treat long bone fractures in patients in whom
use of autograft treatments has failed or is not a feasible option. Stryker continues to develop
OP-1 for spinal indications, including spinal stenosis, and is working with the FDA to obtain
U.S. marketing clearance. In 2006, SYK began the initial launch of a hip resurfacing product in
certain international markets.
MedSurg2
The medical and surgical equipment unit operates through four units. Stryker Instruments
sells powered surgical drills, saws, fixation and reaming equipment, as well as other instruments
used for drilling, burring, rasping or cutting bone, wiring or pinning bone fractures, and
preparing hip or knee surfaces for the placement of artificial hip or knee joints. Stryker
Endoscopy offers medical video cameras, light sources, arthroscopes, laparascopes, powered
surgical instruments, and disposable suction/irrigation devices. Stryker Medical produces 30
types of specialty stretchers customized for acute care and specialty surgical facilities. Stryker
Leibinger makes plate and screw systems for craniomaxillofacial surgery to repair small bones in
the hands, face and head, and sells a proprietary bone substitute material, Bone-Source.
Physical Therapy Services3
In June 2007, the company sold its outpatient physical therapy division, Physical Therapy
Associates to the private equity firm Water Street Healthcare Partners, for about $150 million in
cash. Stryker recorded a special gain of $0.06 per share in the second quarter of 2007 related to
the sale.
The break-up of the product-line sales of Stryker Corp. in 2006 is shown in the chart below:
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S&P Report
2
S&P Report
3
S&P Report
2
Product Line Sales
5%
38% Orthopedic Implants
MedSurg Equipment
Physical Therapy Services
57%
Competitive Forces
Historical Stock Price
The stock price of Stryker has been steadily rising over the last year. It has consistently
outperformed the S&P 500 over this same period of time.
Competition
Stryker Corp. has direct competition with Smith & Nephew plc, Zimmer Holdings Inc.,
and DePuy Inc., a private company, in the orthopedics segment. The 3 companies are relatively
comparable and I thought all these 3 had good basic fundamentals to invest in, but I chose
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Stryker Corp. because the stock price of Zimmer Holdings has been very volatile over the last 3-
4 years or so. Smith & Nephew also looked a good stock, but it was based in UK so I thought we
would have more analysts’ information for Stryker Corp.
SYK Pvt1 SNN ZMH Industry
Market Cap: 28.71B N/A 11.59B 15.78B 112.46M
Employees: 18,806 5,1401 8,830 7,000 153
Qtrly Rev Growth (yoy): 12.30% N/A 24.40% 10.20% 15.70%
Revenue (ttm): 6.00B 392.80M1 3.17B 3.76B 29.17M
Gross Margin (ttm): 66.39% N/A 27.14% 77.93% 58.07%
EBITDA (ttm): 1.64B N/A 850.00M 1.51B -761.60K
Oper Margins (ttm): 21.31% N/A 20.14% 34.32% -5.08%
Net Income (ttm): 943.60M N/A 336.00M 754.10M -2.59M
EPS (ttm): 2.330 N/A 1.90 3.154 N/A
P/E (ttm): 30.06 N/A 32.40 21.19 27.54
PEG (5 yr expected): 1.56 N/A 1.69 1.24 1.62
P/S (ttm): 4.69 N/A 3.63 4.20 3.56
Pvt1 = DePuy Inc. (privately held)
SNN = Smith & Nephew plc
ZMH = Zimmer Holdings Inc.
Industry = Medical Instruments & Supplies
The chart below shows that Stryker has outperformed the S&P 500 and Zimmer Holdings
Inc. and done very similarly to Smith & Newman plc.
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Valuation
The first step is to calculate the discount rate, or the rate of capitalization. I use the risk
free rate of 3.55% which is based on the 90-day T-Bill rate, and a market rate of 10.23%.
Msn Money has a beta of 0.65, Reuters of 0.69, S&P of 0.66, and Google Finance of 0.60.
Yahoo finance has a beta of 1.31 which is totally different from 4 other sources, and so I’m
taking a beta of 0.65 for this valuation.
Discount Rate
K=Rf+β(Rp)
K=3.55+0.65(10.23-3.55)
K=7.89%
Based on the above calculation, the required discount rate is 7.89%.
Warren Buffett Way Owners' Earnings Discount Model
I use the Warren Buffett Way Owners' Earnings Discount Model for my valuation.
Analysts on yahoo finance have predicted a growth rate of 18.28% over the next 5 years and Msn
Money has a growth rate of 19.10%. The Owner’s Earnings Discount Model is computed as
under (I’ve taken a first-stage growth rate over a 10 year period):
Warren Buffett Way Owners' Earnings Discount Model
assuming discount rate (k) of 7.89%
Owner Earnings in 2006:
Net Income $ 777,700,000.00
Depreciation $ 123,500,000.00
Amortization $ 208,300,000.00
Capital Expenditures $ (217,500,000.00)
Owner Earnings $ 892,000,000.00
Year:
2006
Prior Year Owner Earnings $ 892,000,000.0
First Stage Growth Rate (add) 12.0%
Owner Earnings $ 999,040,000.0
Discounted Value per annum $999,040,000.0
Sum of present value of owner earnings $11,889,120,139.6
Residual Value
Owner Earnings in year 10 $ 2,770,416,601.8
Second Stage Growth Rate (g) (add) 4.00%
Owner Earnings in year 11 $ 2,881,233,265.9
Capitalization rate (k-g) 3.89%
Value at end of year 10 $ 74,067,693,211.23
Present Value of Residual $34,659,068,633.84
Intrinsic Value of Company $46,548,188,773.42
Shares outstanding assuming dilution 407,900,000.00
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Intrinsic Value per share $114.12
According to the following scenarios that I ran, using terminal growth rates of 3%, 4%,
and 5%, only under extremely conservative circumstances is the stock currently trading at a
value higher than its market price. Even modest scenarios are giving a resulting intrinsic value
that is higher than its market value. So it is very reasonable to believe that this stock is under-
valued in the market.
Terminal Growth
3% 4% 5%
6% $ 60.04 $ 70.43 $ 88.02
7% $ 64.95 $ 76.37 $ 95.68
8% $ 70.26 $ 82.79 $ 103.99
9% $ 76.00 $ 89.74 $ 112.99
First-Stage Growth 10% $ 82.19 $ 97.25 $ 122.72
11% $ 88.88 $ 105.36 $ 133.24
12% $ 96.09 $ 114.12 $ 144.62
13% $ 103.87 $ 123.57 $ 156.91
14% $ 112.25 $ 133.77 $ 170.17
15% $ 121.28 $ 144.76 $ 184.49
Analysts’ Opinions
This is what the analysts have to say about this Stryker Corp. The general consensus is an
average buy or hold. Most importantly, no analyst on yahoo finance, msn money, reuters, or S&P
report recommended to sell this stock.
Current Month Last Month Two Months Ago Three Months Ago
Strong Buy 6 6 5 5
Buy 4 4 5 5
Hold 11 11 11 12
Sell 0 0 0 0
Strong Sell 0 0 0 0
Yahoo Finance
Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago
Strong Buy 7 7 7 8
Moderate Buy 1 1 1 1
Hold 11 11 11 10
Moderate Sell 0 0 0 0
Strong Sell 0 0 0 0
Msn Money
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Recommendation
The stock price increase over the recent past and the consistent net profits over the last 10
years is what make it a good stock to invest in. I recommend that we buy 500 shares of Stryker,
but it entirely depends how much and if we want to sell other stocks in order to buy into this one.
This would have a current market value of $35,020 for the current market price of $70.04 per
share. I think this is a good company to invest in because orthopedics is a sustainable segment of
the healthcare sector. The baby-boomers generation will also be a reason for the continuous
growth of Stryker Corp. My recommended stop-loss price is $55.00 per share which is 21.4%
below the current market price
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Income Statement
(Amt in millions)
2006 2005 2004 2003 2002
Revenue 5,405.6 4,871.5 4,262.3 3,625.3 3,011.6
Total Revenue 5,405.6 4,871.5 4,262.3 3,625.3 3,011.6
Cost of Revenue, Total 1,848.7 1,718.5 1,513.8 1,312.4 1,111.2
Gross Profit 3,556.9 3,153.0 2,748.5 2,312.9 1,900.4
Selling/General/Administrative Expenses, Total 2,061.7 1,853.5 1,683.5 1,416.0 1,165.4
Research & Development 324.6 284.7 214.9 180.2 141.4
Depreciation/Amortization 43.6 48.8 47.8 45.4 28.9
Interest Expense (Income), Net Operating 0.0 0.0 0.0 0.0 0.0
Unusual Expense (Income) 52.7 15.9 120.8 0.0 17.2
Other Operating Expenses, Total 0.0 0.0 0.0 0.0 0.0
Operating Income 1,074.3 950.1 681.5 671.3 547.5
Interest Income (Expense), Net Non-Operating -9.5 -7.7 -6.8 -22.6 -40.3
Gain (Loss) on Sale of Assets 0.0 0.0 0.0 0.0 0.0
Other, Net 39.0 12.2 3.4 3.8 -0.5
Income Before Tax 1,103.8 954.6 678.1 652.5 506.7
Income Tax - Total 326.1 311.0 238.1 199.0 161.1
Income After Tax 777.7 643.6 440.0 453.5 345.6
Minority Interest 0.0 0.0 0.0 0.0 0.0
Equity In Affiliates 0.0 0.0 0.0 0.0 0.0
U.S. GAAP Adjustment 0.0 0.0 0.0 0.0 0.0
Net Income Before Extra. Items 777.7 643.6 440.0 453.5 345.6
Total Extraordinary Items 0.0 0.0 0.0 0.0 0.0
Net Income 777.7 643.6 440.0 453.5 345.6
Msn Money
Balance Sheet
(Amt in millions)
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2006 2005 2004 2003 2002
Period End Date 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002
Assets
Cash and Short Term Investments 1,414.8 1,056.5 349.4 65.9 37.8
Cash & Equivalents 416.6 491.2 349.4 65.9 37.8
Short Term Investments 998.2 565.3 0.0 0.0 0.0
Total Receivables, Net 907.0 770.3 751.1 498.6 406.7
Accounts Receivable - Trade, Net 907.0 770.3 751.1 498.6 406.7
Accounts Receivable - Trade, Gross
Provision for Doubtful Accounts
Total Inventory 677.6 563.5 552.5 467.9 426.5
Prepaid Expenses 117.7 96.7 82.1 58.0 52.8
Other Current Assets, Total 417.2 383.1 407.5 307.2 227.5
Total Current Assets 3,534.3 2,870.1 2,142.6 1,397.6 1,151.3
Property/Plant/Equipment, Total - Net 1,239.4 1,076.6 700.5 604.7 519.2
Goodwill, Net 531.3 513.2 506.3 493.4 460.0
Intangibles, Net 405.7 409.7 456.9 472.1 475.1
Long Term Investments 0.0 0.0 0.0 0.0 0.0
Note Receivable - Long Term 0.0 0.0 0.0 0.0 0.0
Other Long Term Assets, Total 163.1 122.9 277.5 191.3 209.9
Other Assets, Total 0.0 0.0 0.0 0.0 0.0
Total Assets 5,873.8 4,992.5 4,083.8 3,159.1 2,815.5
Liabilities and Shareholders' Equity
Accounts Payable 252.2 206.5 214.5 137.8 106.0
Payable/Accrued 0.0 0.0 0.0 0.0 0.0
Accrued Expenses 786.6 743.0 702.7 550.4 432.1
Notes Payable/Short Term Debt 0.0 0.0 0.0 0.0 0.0
Current Port. of LT Debt/Capital Leases 14.8 47.4 9.3 7.3 10.7
Other Current Liabilities, Total 297.9 251.9 187.0 138.9 158.7
Total Current Liabilities 1,351.5 1,248.8 1,113.5 834.4 707.5
Total Long Term Debt 0.0 184.2 0.7 18.8 491.0
Long Term Debt 0.0 184.2 0.7 18.8 491.0
Deferred Income Tax 0.0 0.0 0.0 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0
Other Liabilities, Total 331.3 259.3 217.6 151.1 118.8
Total Liabilities 1,682.8 1,692.3 1,331.8 1,004.3 1,317.3
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Redeemable Preferred Stock 0.0 0.0 0.0 0.0 0.0
Preferred Stock - Non Redeemable, Net 0.0 0.0 0.0 0.0 0.0
Common Stock 40.8 40.5 40.3 39.9 19.8
Additional Paid-In Capital 569.1 452.0 218.1 150.2 120.7
Retained Earnings (Accumulated Deficit) 3,490.5 2,802.5 2,297.6 1,868.1 1,442.6
Other Equity, Total 90.6 5.2 196.0 96.6 -84.9
Total Equity 4,191.0 3,300.2 2,752.0 2,154.8 1,498.2
Total Liabilities & Shareholders’ Equity 5,873.8 4,992.5 4,083.8 3,159.1 2,815.5
Msn Money
Cash Flow
(Amt in millions)
2006 2005 2004 2003 2002
Net Income/Starting Line 777.7 643.6 440.0 453.5 345.6
Depreciation/Depletion 123.5 106.1 102.7 97.2 86.3
Amortization 208.3 183.8 148.2 132.5 99.8
Deferred Taxes -27.1 7.9 -72.7 -32.9 -1.8
Non-Cash Items 130.5 86.7 41.1 65.6 52.7
Changes in Working Capital -345.6 -194.7 -99.8 -67.4 -66.4
Cash from Operating Activities 867.3 833.4 559.5 648.5 516.2
Capital Expenditures -217.5 -271.7 -187.8 -144.5 -139.0
Purchase of Fixed Assets
Other Investing Cash Flow Items, Total -524.8 -631.3 -136.2 -7.1 -172.8
Cash from Investing Activities -742.3 -903.0 -324.0 -151.6 -311.8
Financing Cash Flow Items 20.0 16.6 52.5 0.6 0.1
Other Financing Cash Flow
Total Cash Dividends Paid -44.6 -36.2 -28.0 -23.7 -19.7
Issuance (Retirement) of Stock, Net 48.6 30.4 37.3 26.9 19.7
Issuance (Retirement) of Debt, Net -227.2 221.5 -17.4 -480.1 -225.0
Cash from Financing Activities -203.2 232.3 44.4 -476.3 -224.9
Foreign Exchange Effects 3.6 -20.9 3.6 7.5 8.2
Net Change in Cash -74.6 141.8 283.5 28.1 -12.3
Msn Money
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