Stryker Corp

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                                              Stryker Corp. (SYK)
Industry: Medical Instruments &
                                              Company Profile
Recommendation:         Hold
                                              Stryker Corporation, together with its subsidiaries,
Pricing                               operates as a medical technology company worldwide. It
Closing Price   $51.92 (2-1-10)       operates in two segments, Orthopaedic Implants and MedSurg
52-wk High      $57.39 (1-19-10)      Equipment. The Orthopedic Implants segment provides
52-wk Low       $30.82 (3-20-09)      orthopaedic reconstructive, trauma, craniomaxillofacial, and
                                      spinal implant systems; bone cement; and the bone growth
                                      factor OP-1. The MedSurg Equipment segment offers surgical
                                      equipment; surgical navigation systems; endoscopic,
Market Data                           communications, and digital imaging systems; and patient
Market Cap      $20.65 B              handling and emergency medical equipment. Stryker
Total assets    $7.60 B
                                      Corporation sells its products through local dealers and direct
Trading vol.    1.9M (3mon avg)
                                      sales force to doctors, hospitals, and other healthcare facilities.
                                      The company was founded in 1941 and is headquartered in
Valuation                             Kalamazoo, Michigan.
EPS (ttm)       $2.77
P/E (ttm)       18.83                        Stryker’s global market consists of North and South
PEG             1.33                  America, Europe, Middle East, Africa, Asia, and the Pacific.
Div Yield       1.15                  About two-thirds of Stryker’s sales come from our domestic
                                      market and one-third from international markets. This ratio is
Profitability & Effectiveness (ttm)   continually evening out as the demand abroad increases.
ROA             12.46%
ROE             18.45%
Profit Margin 16.47%
Oper Margin 24.71%
Gross Margin 67.52%

                                                                 Percentage Sales


ANALYST NAME                                                                                    International
Justin Nagel
Product Lines

         Orthopaedic Implants are designed and manufactured by Stryker Orthopaedics, Stryker
Osteosynthesis, Stryker Spine and Stryker Biotech and consist of such products as implants used
in joint replacement, trauma, craniomaxillofacial, and spinal surgeries; bone cement; and the
bone growth factor OP-1, along with screws, plates, nails, and rods . The Company supports
surgeons with technology, procedural development and specialized instrumentation as they
develop MIS techniques. The Company's surgical navigation systems are used in MIS
procedures to improve the accuracy of measurements and to position the implant.

Orthopaedic Implants
         A large part of Stryker’s product mix deals with orthopaedic implants that include: hip,
knee, joint, shoulder, and elbow implants. For these surgeries the implants are made up of
artificial joints that consist of cobalt chromium, titanium alloys, ceramics or ultrahigh molecular
weight polyethylene and are implanted in patients whose natural joints have been damaged by
arthritis, osteoporosis, other diseases or injury. The Company’s reconstructive implants are
suited to minimally invasive surgery (MIS) procedures that are intended to reduce soft-tissue
damage and pain while hastening return to function.
         ex. A product that is awaiting release is the X3 Polyethylene and is supposed to be the
next generation implant because of its highly cross linked polyethylene. This implant should
offer a higher level of strength and wear reduction in both hip and knee replacements. As well as
increase the implants longevity.
         ex. Within the category of the knee implants a new product using the X3 material along
with the new Triathlon PKR (unicompartmental knee system). Has been designed to resurface
specific areas, and leave healthy areas intact. This should help increase mobility and stability of
the knee. In 2008 this new system was released in Europe and Canada, and soon will be available
in the Japanese market.

Bone Cement
       Of the products that are available in Stryker’s portfolio, their bone cement product
Simplex Bone Cement is the most widely used cement in the world. This cement has been
available to the market for over 50 years. In addition, they have developed other cements such as
non-antibiotic and antibiotic cement, and SpeedSet Cement in order to cater to the needs of

Trauma Systems
       This segment of orthopaedic’s includes shafts, wiring, nailing, plating, external fixation
systems and bone substitutes. Stryker has expanded the selection within this category to include
long and short nails, smaller diameter pins for foot and ankle surgery, as well as a cannulated
screw system to assist surgeons in placing, inserting, and removing locking screws more easily.
        Stryker develops, manufactures, and markets spinal implant products that include: plates,
rods, screws, connectors, spacers, and cages for use in spinal surgeries.

        Stryker provides products that are used in reconstructive/plastic surgeries that are done on
the anatomical areas of the face. This product line consists of plates, screws, mesh, and
instrumentation for cranial and maxillofacial surgeries.

OP-1 Bone Growth
        The company’s OP-1 bone growth factor consists of a natural protein that the body makes
to induce new bone formation when implanted into bone. This product is used currently when
autograft is not feasible and other methods have failed. It is intended to benefit patients by
treating/diagnosing a condition that faces fewer than 4,000 people per year in the U.S. In
addition to the OP-1 Bone Growth factor, Stryker is also improving their OP-1 Putty that is used
in conjunction with spinal surgeries. Furthermore, in development in the OP-1 products is using
this formula for cartilage regeneration properties as well as helping with degenerative disk

       MedSurg Equipment products include surgical equipment; surgical navigation systems;
endoscopic, communications and digital imaging systems, and patient handling and emergency
medical equipment. These products are designed and manufactured by Stryker Instruments,
Stryker Endoscopy and Stryker Medical. The Stryker Instruments and Stryker Endoscopy
product portfolios include micro powered tools and instruments used in orthopaedics, functional
endoscopic sinus surgery, neurosurgery, spinal surgery and plastic surgery.

Surgical Equipment
        This segment includes drilling, burring, rasping, cutting bone; wiring or pinning bone
fractures; and preparing hip and knee surface for placement of artificial implants. Within this
category they have recently developed several new pieces of equipment that are helping make
physicians jobs easier, as well as improving conditions for their patients.
        ex. A new bone cements mixing system, offering physician’s one solution for use in
mixing any and all of the surgical cements.
        ex. Another piece of equipment recently released is the PainPump2, this item was
designed to electronically control the flow rates of pain medicine, and release the meds directly
to the surgical site to help with discomfort.

Surgical Navigation Systems
        The navigation systems that Stryker develops and produces further the technology limits
that are available to physicians. These advances in equipment allow electronic images to be
viewed more clearly, and helps reduce the need to place additional pins into surgical incisions
during the operation.
        Stryker is helping to streamline the medical field through the communications and
endoscopic segment with improvements in video imaging technology, and communication
equipment. The communication equipment facilitates local and worldwide sharing of medical
information among operating rooms, doctor’s offices, and teaching institutions. Some of the
products that are offered by Stryker are: medical video cameras, digital documentation
equipment, digital image & viewing software, and powered surgical instruments. The
development of fiber optics and high definition has assisted physicians by allowing them to view
internal anatomy with a much higher degree of clarity.

Patient Handling and Emergency Medical Equipment
        Stryker has several products that are available in order to transport and take care of
patients. Some of these products consist of: stretchers, overbed tables, symmetry recliners, and
bed scales. All of the products have functional designs, with comfort and reliable support.

                                Product Portfolio Sales

SWOT Analysis

    Broad product portfolio insulating concentration risks
    Robust financial performance building shareholders confidence

   Geographic concentration enhancing business risks
   Products recall on manufacturing ground impacting reputation
   Low presence in emerging Asian markets may restrict the growth

   New product launches to expand revenue base
   Favorable trend in U.S. demography boosting demand for medical devices

    Industry consolidation intensifying competition
    Quality reprimand by FDA could adversely affect the company’s business
    Federal Medical Device Taxes

       As seen above Stryker caters to several firms needs in the healthcare industry by
providing equipment and other supplies to surgeons. That assists them in performing day to day
operations, as well as providing these individuals with the latest in technologically advanced
equipment that is catered to their demands. In catering to the customers’ demands Stryker can
keep their R&D costs down, because they maintain close relationships and listen to what the new
needs and demands are and redefine the current products to fit. Furthermore, Stryker has over 30
years of clinical history with their hip systems, and 20+ years with their cement systems.

        A major weakness that Stryker faces and needs to deal with is that as the world flattens,
they need to make sure that their presence touches everyone around the globe. They are currently
making good progress in establishing their presence in markets such as the Europe market but
need to spread in to other emerging markets before it is too late. Another area that Stryker needs
to be constantly aware of is in its inventory reserves. They maintain a large amount of
inventories but obsolescence is always a factor to a technology device firm.

        The majority of the products that Stryker provides are considered products consisting of
short lives, approximately 70%. This is because even though an implant will last for a
considerably long time, it is only used once by the hospitals. In addition, the large turn over those
hospitals have for implants, and the population of baby boomers having more and more problems
with arthritis, osteoporosis, and injury. Stryker has also acquired other companies, such as
Sightline Technologies Ltd., in order to gain market share in areas that it currently operates. This
also helps in further developing the MedSurg area of their portfolio.

         A major factor that could threaten the potential earnings of Stryker and other companies
in the medical equipment and supplies area of healthcare is the proposed Medical Device Tax.
The tax will be issued based on the share of total industry sales from the prior year, unless your
company generates revenue of less than $5 million. This tax as it is currently is going to begin in
2011 and the government wants to receive close to $2 billion per year over the next 10 years.
According to one analysts prediction this tax will hurt the industry’s earnings about 3%-4%.
What this means for Stryker, is that they currently gain 17% after all expenses and taxes are paid
from their sales revenue. If this tax passes Stryker will be setting up to only earn 13-14% from
their total sales revenue.

Competitive Forces

Historical Stock Prices
         Over the last year Stryker Corp. has underperformed compared to our benchmark the
S&P 500. However given the circumstances of the recent recession they have made tremendous
progress in recovering what they had lost, and has remained close to the benchmark. Over the
last five years Stryker has outperformed the benchmark slightly.

1 Year
5 Year

        Some of the competition that Stryker Corp. faces in the medical instruments and supplies
industry is: DePuy (subsidiary of Johnson & Johnson), Zimmer Holdings Inc., and Smith &
Nephew plc. These three companies all have similar/proportional numbers as can be seen in the
chart below. For DePuy I was not able to find all of the data needed for this chart but in
reviewing the Johnson & Johnson annual report I did find that DePuy contributed $5 Billion in
sales. This accounted for an 8.8% increase over the previous year, however, they contributed it
primarily to new product launches in the orthopaedic joint reconstructive products.

                                        DIRECT COMPETITOR COMPARISON

                                                   SNN           SYK            ZMH           Industry

                   Market Cap:                           8.77B         20.32B     11.68B          130.18M

                   Employees:                            9,757           N/A          8,000              288

              Qtrly Rev Growth (yoy):                 -1.60%           6.80%          7.50%        17.60%

                  Revenue (ttm):                         3.67B          6.72B         4.10B        75.04M

                Gross Margin (ttm):                   74.09%       67.52%         75.81%           51.29%

                  EBITDA (ttm):                          1.09B          2.05B         1.47B         2.92M

               Oper Margins (ttm):                    22.42%       24.71%         27.71%            0.84%
                Net Income (ttm):                      461.00M             1.11B   717.40M    N/A

                    EPS (ttm):                             2.60            2.773     3.324    N/A

                    P/E (ttm):                            19.09            18.42     16.73   23.63

               PEG (5 yr expected):                        1.57             1.32      1.46    1.42

                    P/S (ttm):                             2.45             3.11      2.93    2.04

                                                SYK = Stryker Corp.

                                             ZMH = Zimmer Holdings Inc.

                                      Industry = Medical Appliances & Equipment

2 Year

Analysts’ Opinion

        The opinions of the analyst’s are very similar for Stryker, and Zimmer Holdings
recommending to either Buy or Hold. However, the analyst’s are recommending to mainly Hold
shares of Smith and Newphew. It may be that they are a foreign company or that they have been
growing in recent years and are not going to be able to sustain that growth. Either way it seems
that Stryker and Zimmer Holdings seem to be fairly similar in their results.
                                 SYK              SNN                ZMH
Stong Buy                                     6                  0                 6
Buy                                           5                  1                 3
Hold                                         15                  3                16
Underperform                                  2                  0                 1
Sell                                          0                  1                 0


In valuing Stryker I used Warren Buffett’s Owner’s Earnings Model.

Discount Rate:
      Beta: .89         Risk free Rate (10 Year T-Bill): 3.2%               Market Return: 11%

K = Rf + β(Rm-Rf)

K= 3.2 + .89(11-3.2)              K=10.14%

 Two-Stage Discounted Free Cash Flow Valuation Model
 assuming discount rate (k) of                          10.00%

 Free Cash Flow ("owner earnings") in 2009:
 Net Income                                       1,147.80
 Average Increase in Working Capital (subtract)   (622.00)
 Depreciation (add)                               387.60
 Amortization (add)
 Average Capital Expenditures (subtract)          155.20
 Free Cash Flow (Owner Earnings)                  1,068.60

 FIRST STAGE                                                                                           Year:
                                                          2010       2011      2012       2013       2014         2015
 Prior Year Free Cash Flow                        1,068.6        $1,164.8   $1,269.6   $1,345.8   $1,426.5     $1,540.6
 First Stage Growth Rate (add)                          9.0%        9.0%       6.0%       6.0%       8.0%         7.0%
 Free Cash Flow                                   1,164.8        $1,269.6   $1,345.8   $1,426.5   $1,540.6     $1,648.5
 Discounted Value per annum                          $1,164.8    $1,154.2   $1,112.2   $1,071.8   $1,052.3     $1,023.6

 Sum of present value of owner earnings            $10,401.5
Residual Value
Free Cash Flow in year 10                       2,160.8
Second Stage Growth Rate (g) (add)                   4.00%
Free Cash Flow in year 11                       2,247.3
Capitalization rate (k-g)                            6.00%
Value at end of year 10                         37,454.55

Present Value of Residual                       $14,440.35
Intrinsic Value of Company                      $24,841.86

Shares outstanding assuming dilution                 413.6
Intrinsic Value per share                           $60.06

                                       Terminal Growth Rate
                                          3%       4%         5%
                                5%      46.08    50.33      56.28
                                6%      49.56    54.23      60.77
First Stage Growth
Rate                            7%      53.32    58.45        65.64
                                8%      57.37       63        70.89
                                9%      61.74    67.91        76.56
                               10%      66.44     73.2        82.68
                               11%       71.5    78.91        89.28
                               12%      76.95    85.05        96.39
                               13%      82.81    91.66       104.06

After reviewing this company and the Healthcare industry overall I would agree with the
analyst’s recommendations. For our portfolio our best position for this stock would be to hold the
shares that we have because there is a lot of potential in the medical instruments and supplies
area. Stryker is in a good financial position even if the proposed tax increase should pass. They
are currently making 17% of their total sales revenue as profit. In the event that the tax is
implemented, I am sure it will be shared between Stryker, the hospitals, and the ending customer.
Whatever should happen with the Obama administration and public healthcare, there will remain
a high demand for the products that Stryker produces. Furthermore, in valuing Stryker Corp.
following the same model that Warren Buffett uses the intrinsic value using conservative
numbers gives a number similar to what the stock is currently trading for.
                                      Income Statement

      View: Annual Data | Quarterly Data                                           All numbers in thousands

          PERIOD ENDING                                       31-Dec-08     31-Dec-07         31-Dec-06

           Total Revenue                                     6,718,200      6,000,500        5,405,600

          Cost of Revenue                                    2,131,400      1,865,200        1,848,700

            Gross Profit                                     4,586,800      4,135,300        3,556,900

                                           Operating Expenses

          Research Development                                    367,800    375,300           324,600

     Selling General and Administrative                      2,625,100      2,391,500        2,061,700

               Non Recurring                                       34,900     19,800             52,700

                  Others                                           40,000     41,400             43,600

         Total Operating Expenses                            3,067,800      2,828,000        2,482,600

     Operating Income or Loss                                1,519,000      1,307,300        1,074,300

                                    Income from Continuing Operations

      Total Other Income/Expenses Net                              61,200     62,800             29,500

     Earnings Before Interest And Taxes                      1,580,200      1,370,100        1,103,800

             Interest Expense                                           -           -                  -

            Income Before Tax                                1,580,200      1,370,100        1,103,800

            Income Tax Expense                                    432,400    383,400           326,100

              Minority Interest                                         -           -                  -

      Net Income From Continuing Ops                         1,147,800       986,700           777,700

                                           Non-recurring Events

          Discontinued Operations                                       -     30,700                   -

            Extraordinary Items                                         -           -                  -

       Effect Of Accounting Changes                                     -           -                  -

                Other Items                                             -           -                  -

            Net Income                                       1,147,800      1,017,400          777,700

Preferred Stock And Other Adjustments                                   -           -                  -
Net Income Applicable To Common Shares                           $1,147,800   $1,017,400             $777,700

                                        Balance Sheet

         View: Annual Data | Quarterly Data                                               All numbers in thousands

         PERIOD ENDING                                         31-Dec-08      31-Dec-07                31-Dec-06


                                              Current Assets

       Cash And Cash Equivalents                                701,100        290,500                  416,600

         Short Term Investments                                1,494,500      2,120,300                 998,200

             Net Receivables                                   1,651,400      1,565,100               1,324,200

                 Inventory                                      952,700        796,200                  677,600

           Other Current Assets                                 179,600        132,800                  117,700

       Total Current Assets                                    4,979,300      4,904,900               3,534,300

      Long Term Investments                                     275,200               -                         -

   Property Plant and Equipment                                 963,800        991,600                  951,700

             Goodwill                                           567,500        527,400                  531,300

         Intangible Assets                                      368,000        398,100                  693,400

     Accumulated Amortization                                          -              -                         -

           Other Assets                                         237,300        360,200                   44,500

 Deferred Long Term Asset Charges                               212,200        171,800                  118,600

           Total Assets                                        7,603,300      7,354,000               5,873,800


                                          Current Liabilities

            Accounts Payable                                   1,441,600      1,316,200               1,336,700

      Short/Current Long Term Debt                               20,500         16,800                   14,800

         Other Current Liabilities                                     -              -                         -

     Total Current Liabilities                                 1,462,100      1,333,000               1,351,500

          Long Term Debt                                               -              -                         -

        *Other Liabilities*                                     734,500        642,500                  331,300

Deferred Long Term Liability Charges                                   -              -                         -

          Minority Interest                                            -              -                         -

         Negative Goodwill                                             -              -                         -
                Total Liabilities                         2,196,600    1,975,500   1,682,800

                                         Stockholders' Equity

          Misc Stocks Options Warrants                            -            -           -

           Redeemable Preferred Stock                             -            -           -

                Preferred Stock                                   -            -           -

                 Common Stock                               39,600       41,100       40,800

               Retained Earnings                          4,389,500    4,364,700   3,490,500

                 Treasury Stock                                   -            -           -

                 Capital Surplus                           812,800      711,900      569,100

            Other Stockholder Equity                       164,800      260,800       90,600

            Total Stockholder Equity                      5,406,700    5,378,500   4,191,000

              Net Tangible Assets                        $4,471,200   $4,453,000   $2,966,300

*Other Liabilities
Long-Term Debt                                    20.5
Operating Leases                                  166.9
Unconditional Purchase Obligations                567.9
Contribution to defined benefits plans            21.5
Other                                             21.9
                                              Cash Flow

       View: Annual Data | Quarterly Data                                          All numbers in thousands

              PERIOD ENDING                                   31-Dec-08       31-Dec-07         31-Dec-06

                Net Income                                    1,147,800       1,017,400          777,700

                    Operating Activities, Cash Flows Provided By or Used In

                Depreciation                                    387,600         366,600          331,800

        Adjustments To Net Income                               104,300         (71,400)         103,400

     Changes In Accounts Receivables                           (131,200)       (133,500)         (111,800)

           Changes In Liabilities                                29,400         115,000           63,100

          Changes In Inventories                               (180,200)        (89,900)          (86,800)

   Changes In Other Operating Activities                       (181,800)       (175,900)         (210,100)

Total Cash Flow From Operating Activities                     1,175,900       1,028,300          867,300

                    Investing Activities, Cash Flows Provided By or Used In

            Capital Expenditures                               (155,200)       (187,700)         (217,500)

                Investments                                     470,900       (1,079,500)        (428,100)

  Other Cashflows from Investing Activities                       (5,600)        89,000           (96,700)

Total Cash Flows From Investing Activities                      310,100       (1,178,200)        (742,300)

                    Financing Activities, Cash Flows Provided By or Used In

              Dividends Paid                                   (135,600)        (89,700)          (44,600)

          Sale Purchase of Stock                               (949,900)         69,500           48,600

              Net Borrowings                                      6,700             800          (227,200)

 Other Cash Flows from Financing Activities                      32,700          33,000           20,000

Total Cash Flows From Financing Activities                    (1,046,100)        13,600          (203,200)

     Effect Of Exchange Rate Changes                             (29,300)        10,200             3,600

  Change In Cash and Cash Equivalents                         $410,600        ($126,100)         ($74,600)

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