Key Takeaways:
· Sales down -24% but exit rate -10%, margins deleverage due to mix and sales decline
· No guidance still due to uncertainties
· Mako robots still in demand despite the crisis; SYK offering financial option to help hospital afford the robot (less upfront capex for hospitals, use of lease agreements)
· Financial liquidity remains good with $3B of undrawn credit facilities
· Wright Medical acquisition pending (borrowed $2.3B at low rates), should close in late 3Q/early 4Q – no other major transaction in the foreseeable future
Current Price: $190 Price target: $232
Position size: 2.40% 1-year Performance: -9%
Stryker released their 2Q20 results with organic sales down 24% y/y. This decline in sales is related to COVID-19 as close to half of Stryker’s sales are levered to elective surgeries. Within the quarter, trends improved from -36% in April to -10% in June (and even better trend seen in July). Geographically China, Australia, and Germany recovered the quickest, reaching ~85-90% of pre-COVID-19 levels. On the other side, the UK, India, and LatAm are seeing a slower recovery, reaching less than 50%. The management team commented on the high profitability of the hip/knee/extremities reconstructive surgeries, and the need for the hospitals to get those done, thus accelerating the pace of the recovery for those categories. The rapid expansion of inpatient & ICU capacity globally has pushed up the demand for their beds/stretcher, defibrillators and PPE equipment. While Mako has seen increased competition recently and hospital budgets squeezed, SYK has noted an even faster rate of new accounts deals. We see this as a proof of the quality of its robots and the good job of the sales team during the crisis. On the profitability front, gross margins were down quite a bit y/y (860bps) due to the sales mix and reduced top line (deleverage). The manufacturing capacity stood at 60% in 2Q, and should go to 85% in 3Q, still pressuring margins down. This should reverse towards 2021 as sales bounce back.
Overall the quarter was as expected (aside from Mako sales strength). We think this is a company that should come out of the crisis stronger, between the diversity of its products and resilience of its sales team, it should continue to perform well long-term.
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
$SYK.US
[category earnings] [tag SYK]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
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Suite 500
Boston, MA 02109