Stryker Posts Another Strong Quarter

Editor's note: At the time of publication (July 25, 2018), a family member of the analyst owned shares in Stryker (SYK) in an account managed by a third party. Morningstar has confirmed that her ownership of Stryker did not influence any ratings or analysis.

Stryker’s SYK second-quarter performance largely met our expectations, and the firm remains on track to hit our full-year projections. After minor adjustments to our model, we’re retaining our fair value estimate. With consistency that we rarely see in medical technology, Stryker has delivered another quarter of strong growth across all three of its segments, which translated into 8% consolidated organic growth year over year. Stryker’s impressive performance over the past two years underscores its wide economic moat, especially its intangible assets, including ongoing innovation and relationships with practitioners.

Bolstered by the placement of its Mako robot, Stryker has seen eight consecutive quarters of above-market growth in knees. For perspective, in the second quarter Stryker’s hips and knees grew 4.3% and 8.5%, respectively, while Johnson & Johnson’s hips grew 1.2% and knees declined 2.2%. We anticipate that Stryker’s strength should last at least into 2019, when rival Zimmer Biomet is expected to launch its own robot with a total knee replacement indication in 2019. However, Zimmer Biomet has been wrestling with its own significant operational and regulatory challenges, which have yet to be fully quelled. If Zimmer Biomet makes progress in putting its house in order over the second half of this year, we think it could put a little competitive pressure on Stryker’s robot placements.

In the meantime, we’re eagerly awaiting clinical data on Stryker’s robot. As we’ve discussed previously, it remains unclear whether the Mako robot (or any orthopedic robot, for that matter) improves clinical outcomes. We expect to see our first hint on this issue next spring, as more data about Mako is released. If the results are favorable, this will only add fuel to the robot fire. However, negative results could damp demand for robots.