Stryker: Excellent Recent And Continuing Performance (NYSE:SYK)

In these challenging times there is always interest in companies that outperform and provide solid returns. This is particularly the case after the poor 2022 performance of the SP500 (down 19.4%) and anxiety about possible recession in 2023. Conservative investors look for “recession-proof” investments and this puts healthcare back in the spotlight as health is a “must attend to” issue. One company that attracted my attention some time ago is Stryker (NYSE:SYK). In early 2022 I wrote about Stryker and COVID delays. The point is that need for knee surgery doesn’t go away. Here I revisit Stryker, which has had a stellar end to 2022, the share price being up 27.6% in the past 6 months although year on year it is down 5.6%.

Q&A at 5^th Annual Evercore ISI HealthCONx Conference 2022

Readers who follow me know of my interest in getting the unfiltered views of senior management at Q&A sessions; the Stryker Q&A at the Evercore ISI HealthCONx conference is a good example.

In terms of general positioning of Stryker, CEO Kevin Lobo exudes confidence about 2023 being a continuation of very strong performance in the second half of 2022. The order book is strong for both large and small capital equipment. The elective surgery demand is strong for both hip and knee and this seems likely to continue beyond 2023 and into 2024. Lobo noted that in the past elective surgery had experienced boom and bust cycles, but with the stress on the hospital system due to COVID this has muted somewhat the potential for boom. This means more steady and prolonged tailwinds. The backlog has increased through 2022 and this gives the company extended visibility up to 9 months. The major challenge has been lockdowns in China. Perhaps this will change soon after the current crisis of emerging from lockdowns is managed.

The bottom line about Stryker is that at a time when healthcare is under great stress it focuses on patient improvements that, while not necessarily cheap to implement, have long term impact. CEO Kevin Lobo makes the point that the big costs in healthcare revolve around long term chronic issues and Stryker is focused on addressing these problems. An example of this is Stryker’s robotics assisted surgery (Mako) that means less pain for the patient, fewer revisions and less time spent on rehabilitation. Another example concerns Stryker’s neurovascular products that pull out clots from the brain. This means less long term trauma, a better future for patients and reduced chronic care.

Stryker’s growth through acquisition

Stryker has grown through innovation and targeted best-of-breed acquisitions to become a dominant player in the areas in which it operates. It has built the business through 46 acquisitions costing $21.4 billion. Stryker has been highly successful at extracting value in acquisitions by being focused on people and culture to maximise the benefits of bringing together highly innovative teams. Acquisitions have always addressed in considerable detail how the new products, and the teams behind them, will enhance Stryker’s existing operations.

A good example of this is the growth of the Trauma and Extremities (repairing fractures head to toe) business, with the $4.7 billion acquisition of Wright Medical in 2020 helping drive this with its upper extremities portfolio. In turn this led to Stryker reorganizing its businesses in this area. It is all about integration and efficiency.

Note that the process of integrating a business takes years to fully implement. An example is the acquisition of Mako Surgical at the end of 2013. Mako’s robotic-assisted surgical platform now accounts for one out of two Stryker knee implants. In the hip area, Mako hips is at 30% growth and it complements the Insignia hip stem based on SOMA (Stryker Orthopedic Modeling & Analytics) bone database which leverages 1300 CT scans. It is worth reading how the different elements have been brought together to leverage substantial business. The way that the Mako robotics business itself is evolving helps one understand the kind of moat that Stryker builds around its business operations.

The $3.09 billion Vocera Communications acquisition in February 2022 brings Stryker into a leadership position in the fast growing area of digital care (workflow) co-ordination and communication. The Vocera team complements Stryker’s Medical Division. The Vocera acquisition was the second biggest of just 11 Medtech deals valued at more than $1 billion in 2022. It is interesting that some analysts didn’t “get” the Vocera acquisition as it was outside of Stryker’s traditional medical and surgical equipment focus. The point is that communication and workflows are becoming central to modern medicine and it is already clear that Stryker made this acquisition with a clear focus as to how it would help shape Stryker’s business going forward. The point is that 75% of a nurse’s day is spent away from patients! Of that 75%, 26% is communication with other health workers, 23% involves documentation and 16% involves medical administration. Perhaps one can see why Stryker needed to acquire Vocera.

New from Stryker

Manufacture

In the second half of 2022 Stryker announced the opening of a major 3D printing facility in Ireland which will house 600 new staff. Stryker’s 3D printing programs involve devices and implants used in orthopedic surgeries (knee, hip, shoulder, ankle, craniomaxillofacial and spine).

OptaBlate

In September Stryker achieved FDA approval for its OptaBlate bone tumor ablation system. This expands Stryker’s Interventional Spine portfolio with minimally invasive treatment options for metastatic vertebral body fractures. This takes Stryker into bone cancer technology.

The above examples are just two of many newsworthy happenings for Stryker in 2022. The breadth of Stryker’s operations are pretty exhausting to dig into. For a comparison with peers in the Medtech industry, Khaveen Investments recent article is helpful.

Dividend increase

In early December Stryker increased its dividend by 7.9%. Before investors get too excited about this, it is important to note that Stryker’s dividend does not make the charts as a company with a high dividend (1.17% dividend yield).

What does the market think?

I find it curious that a number of stocks that I cover don’t attract the attention of Seeking Alpha authors. Stryker has had just one author covering the stock (“buy”) in the past 30 days. Coverage by Wall Street analysts is more complete and as might be expected for a major global medical device company. It has been covered by 27 analysts in the past 90 days, with a balance between buy (11 “strong buy” and 3 “buy”) and hold (12 “hold”) and just one sell recommendation. Seeking Alpha’s Quant rating is hard to please with a “hold” based on extreme ratings (3 “F” for Valuation, Growth and Revisions, and an A for Profitability and A- for Momentum). Perhaps numbers can give one extreme views, but how can a company fail on Value, Growth and Revisions, and yet outperform on Profitability and Momentum?

Conclusion

Stryker has a fine track record of innovation and successful commercialization. It has a long history of, and very strong focus on, growth by acquisition. This has served the company well over many years. 2022 was a mixed year for Stryker which is down 5.6% year on year. However, the second half of 2022 was a different story with the company up 27.6% over the past 6 months. This is an excellent result and the good times look likely to continue. Investors looking for a safe haven in a stormy 2023 might have a close look at this company.

A dilemma for cashed up investors in today’s market concerns whether to look for opportunity in companies that will experience a correction and hence an opportunity for a favorable market entry (assuming that the chosen company will survive and prosper after a correction), or to look for a company that might perhaps even prosper at a time when others are struggling. I think that Stryker fits in the latter category. In a tough market no company is guaranteed to avoid a stock price correction but Stryker seems very confident about its order books and it is pretty clear that cancellations are not seen as a looming problem. From where I sit, in today’s market there are no certainties but I hope that I’ve provided you and your financial advisor some things to think about regarding an investment in Stryker.

I am not a financial advisor but I have followed and participated in the biotech industry for many years. I hope that my perspective is of some value to investors interested in this space.