Why The Long Faces? Stryker’s Financials Are Not Exactly Disastrous

In short

Stryker’s share price fell slightly following release of its quarterly financials conference call. It’s obviously all about expectations, because running our finger over the numbers they look pretty solid compared with certain others. However a tough OUS sales environment, coupled with general downward pricing pressure especially in capital goods means the company has had to lower 2012 growth forecasts.

Background

Sales

Stryker Corporation reported operating results for the third quarter of 2012 with net sales of $2.1 billion, up 1.0%(2.9% constant currency) on the equivalent period a year ago.

Underlying the headline number. net sales in the quarter grew by 3.4% due to increased unit volume and changes in product mix and 0.4% as a result of acquisitions. These increases were partially offset by an unfavorable impact of 0.9% due to changes in price and 1.9% due to the unfavorable impact of foreign currency exchange rates on net sales.

By division, reconstructive sales showed the only decrease and even this was wiped out when adjusting for foreign currency effect. Medsurg and Neuro/Spine both showed healthy growth (3.1% and 6.9% respectively on a constant currency basis), although all three divisions reported downward impact of pricing pressure.

Earnings

Stryker reported diluted net earnings per share of $0.97, an increase of 6.6%. Like other companies, Stryker has been undergoing restructuring activities and assumed related charges of $11 million (net of taxes) in addition to acquisition and integration related charges of $6 million (net of taxes) in this quarter, related to acquisitions completed in 2011. These charges reduced reported gross profit margin from 68.2% to 68.1% and reported operating income margin from 22.9% to 21.9%. We noted that GP% is still a point up on this time last year however, suggesting that whatever the squeezes on price noted on the revenue line, things are more than holding up.

Outlook

Stryker is now projecting sales growth of 2.5% to 4% for 2012, lower than in its forecast of 4% to 5.5%, which it attributes to continued challenging European environment and a softening of its capital sales.

Company comments

“Our third quarter results reflect solid performance for most of our U.S. franchises, however, this was partly offset by weaker results from key countries outside the U.S. and our capital businesses,” commented Kevin A. Lobo, the company’s new President and Chief Executive Officer. “We expect market conditions to remain challenging in Europe and for capital equipment, and as a result we are lowering our earnings outlook for 2012 and 2013. This will ensure that Stryker makes the necessary investments to strengthen its position as a market leader while continuing to deliver leveraged earnings gains.”

Source: Stryker Inc.