Stryker reported strong 4Q 2017 organic sales of +8.1% and EPS +10%, and full year 2017 organic sales of +7.1% (above its latest guidance) and EPS growth of +12%. The stock is consolidating after market on lower 2018 guidance vs consensus, but as a reminder the stock was up ~9% year-to-date, and the management team tends to guide conservatively. We think 2018 guidance to be very decent at +6-6.5% which is better than medtech peers. Overall Stryker continues to perform well and we raise our price target to $188.
Current Price: $167.45 Price Target: $188 (from $158)
Position Size: 3.41% TTM Performance: +37.5%
Thesis Intact. Key takeaways from the earnings release:
1. 4Q17 were pre-announced on January 9th, so no surprises on this front: revenue increased +8.7% ex-FX (+8.1% organic: +9.1% volume, -1% price)
a. Orthopedics +6.8% organic sales growth (+9.3% volume, -2.5% price)
b. MedSurg +8.5% organic sales growth (+8% volume, +0.5% price)
c. Neurotech & Spine +10% organic sales (+11.7% volume, -1.7% price)
d. US sales +9.1%, International sales +7.3% ex-FX
e. Gross margin of 66.4% in Q4, impacted by the Puerto Rico manufacturing facility recovery, and some unfavorable pricing
f. Adjusted operating margin was 27%, down 70bps in 4Q and down 30bps for the year. Adjusting 2017 margin for the Puerto Rico and Sage issues and recent acquisition, operating margin would have been up 30bps
2. Initial 2018 guidance shows strong top line trend to continue
a. Organic sales growth of +6.0-6.5% – the highest level it has ever guided to in its initial target. Just a reminder that this management team guides conservatively and tends to raise it during the year. For example it initially guided to +5.5-6.5% growth for 2017 and ended the year at 7.1%
b. Sales momentum is driven by product cycle (Mako knee replacement) across its divisions and recent acquisitions, while pricing should have a -1% to -1.5% impact, similar to 2017
c. Any additional growth beyond this initial rate will flow to the bottom line
d. Operating improvement of 30-50bps thanks to cost containment measures, and including the negative impact from recent acquisition dilution
e. EPS guidance $7.07-7.17, which includes the negative impact from the recent tax reform
3. Valuation: Stryker’s fundamentals are still attractive. We are raising our PT after updating our model
a. Dividend yield of 1.12%, FCF yield of ~2%
SYK Thesis:
• Consistent top and bottom line growth in the mid and upper single digits respectively
• Continued operating leverage of current infrastructure
• Strong balance sheet and cash flow used in the best interest of shareholders