Stryker Corporation

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

Stryker is a global leader in medical technologies, creating, manufacturing, and selling a wide range of innovative products and services in orthopedics, medical and surgical, and neurotechnology and spine.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Stryker is a medical technology company with a global reach. It operates through three main segments:

  • MedSurg and Neurotechnology: This segment includes surgical equipment, neurosurgical, neurovascular, and communication systems, emergency medical equipment, and a variety of other related equipment and products.
  • Orthopaedics: This segment specializes in implants used for hip, knee, and shoulder joint replacements, as well as for trauma and extremity surgeries.
  • Spine: This segment creates, develops and manufactures spinal products including spinal implants, instrumentation, and a portfolio of interbody implants, facet joint products and tissue and bone grafts

These products serve a critical role in healthcare systems. The overall healthcare industry is heavily dependent on these products which create a stable demand.

Industry Trends:

  • Growing Market: The healthcare industry, and medical technologies specifically, are experiencing significant growth due to the aging population and increased prevalence of chronic conditions and diseases. This trend is likely to continue for the foreseeable future.
  • Technological Innovation: The medical device industry is characterized by continuous innovation, and the development of new and enhanced products are vital for maintaining competitive advantage. Companies that are able to quickly bring new products to market often have a higher profitability ceiling.
  • Regulatory Hurdles: Medical device manufacturers, especially those like Stryker that provide advanced implants, undergo heavy scrutiny in the form of both new regulations and a lot of scrutiny in the approval process. Companies that have the expertise and financial power to pass these are given a clear advantage over those who do not.
  • Consolidation: The medical device industry has seen some degree of consolidation, especially in the mid-cap to small cap companies, which is likely to continue as bigger companies acquire smaller ones. This consolidation is likely because of cost saving purposes.

Competitive Landscape:

Stryker operates in a competitive industry with a number of prominent players.

  • Large-Cap Competitors: Companies like Johnson & Johnson, Medtronic, and Abbott are notable competitors. These established players benefit from their extensive product portfolios and wide distribution networks.
  • Med-Cap Competitors: Zimmer Biomet is also a key competitor, particularly in the orthopedic market. These companies also have large market shares.
  • Emerging Competitors: New market entrants may cause disruption by offering innovative technologies or lower-priced alternatives.
  • Regulatory Challenges: The regulatory approval processes are very expensive and time-consuming and may present challenges for all companies.

What Makes Stryker Different?

  • Strong Brand and Established Reputation: Stryker is a well-recognized brand in the medical device industry which can allow them to price their products better. They have been a part of the industry for decades and have developed a solid reputation over time, establishing brand loyalty and trustworthiness from their consumer base.
  • Product Diversity: Stryker has a wide array of product lines, spread out across different segments. It mitigates risks by diversifying its revenue streams.
  • Extensive Distribution Network: Stryker benefits from its vast global distribution network, ensuring efficient delivery of its products to customers. Its scale of operations also results in great supply-side economies of scale for them to further reduce costs.
  • R&D Capabilities: It has a long history of innovation, and as seen in its latest 10-K form, it has a large number of Research and Development specialists, which has enabled the company to launch innovative new products. The company continues to have a very high amount of R&D investment on their income statement, and these expenses have steadily risen over time.

Financials in Detail:

  • Revenues: Stryker’s revenue streams are quite diverse, with 2023 net sales of $19.9 billion, up from 18.4 billion in 2022 and $17.1 billion in 2021, demonstrating consistent year over year growth. Sales breakdown by geography: United States: 7.21 Billion Europe: 2.8 Billion Asia Pacific: 1.27 Billion Other International: 1.62 Billion

  • Margins: Stryker has solid margins. In 2023 its gross profit margin was 63.6%, it was 63.2% in 2022 and 63.5% in 2021 which are all very impressive gross margins over time. Its operating margin also is quite stable, coming in at 19.7% in 2023, 20.5% in 2022 and 21.7% in 2021. Such solid margins indicate a stable business with solid pricing power.
  • Capital Intensity: The company had capital expenditures of $1.15 billion in 2023, $808 million in 2022 and $815 million in 2021. Their R&D expenditures have been about 8% of revenues for the past 3 years. The firm is pretty asset intensive.
  • Free Cash Flows: In 2023, the company had free cash flow from operations of 2.7 billion USD, 2.2 billion USD in 2022, and 1.7 billion in 2021. Their free cash flow is growing steadily which shows that they are becoming more and more profitable. They have not had negative cash flows for the last five years.
  • Debt: The company has debt obligations of about $15.8 billion in the long run, with a bit less than a third being due within the next year. However, they had cash and cash equivalents of $1.7 billion. In their 2023 annual filings they made an interest payment of $350.2 million. Overall, the debt to assets ratio is low and they have more cash on hand than short-term liabilities.
  • Valuation: Stryker’s share price is influenced by investor sentiments, so it is important to always analyze the company by intrinsic measures. Their P/E is at about 46 as of this writing which is quite high compared to the market. They are also trading at around 6 times book value and their price to cash flow is at 38, all of which make the company seem relatively overpriced.

Recent Concerns/Controversies/Problems Faced:

  • Guidance Revision: In the Q1 2024 earnings calls, the company reduced its earnings guidance and their full year growth rate forecast to 8.5-9%, this has led to a small decrease in its valuation, but also because the company faces headwinds from medical staffing shortages and supply chains. They have stated that these problems are not going away any time soon.
  • China: Stryker, along with a number of other medical device firms, are facing headwinds in China, due to government price reductions on medical equipment. There are also ethical risks, like bribery and corruption, that companies may need to account for.
  • Acquisition of SERF: Stryker had to delay the acquisition of SERF for a few months and is now undergoing a new regulatory hurdle in Europe for medical devices which is affecting this acquisition. There is more uncertainty regarding this transaction.

Moat Rating: 4/5

Stryker has a strong and durable moat based on:

  • Strong Brands and Customer Loyalty: It has a stable consumer base which tends to stick with its products, leading to higher pricing power.
  • Regulatory Approval and Patents: They have a strong R&D capability which leads to innovations and patents. They also have a lot of experience in the regulatory approval process which creates a high barrier for entry into the medical devices market.
  • Scale and Distribution Network: This enables the company to reduce unit costs. Their global reach allows the firm to distribute its products very efficiently, leading to an advantage on costs.
  • Switching Costs: Switching costs exist in industries that rely on complex systems such as healthcare. Once doctors learn how to use one company’s products, or become intimately accustomed to them, they tend to stick with them over a long period.

The moat has a good width, and should be sustainable, however, it is not as wide as what is seen in monopolies.

Risks to the Moat and Business Resilience:

Stryker has excellent business resilience, but there is a set of risks that could possibly affect the moat and harm the business:

  • Increased Competition: The market is very competitive with a few established and very large companies. If they start to underprice Stryker, it could affect the company’s ability to generate revenue. New competitors with disruptive technologies could also upset the company’s business model.
  • Technological Disruption: Although Stryker is heavily invested in R&D, an unforeseen technology development could severely reduce its edge over the competition.
  • Regulatory Challenges and Changes: Changes in regulations, or the introduction of new regulations could seriously affect their business practices, profitability, and revenue growth.
  • Acquisition Integration: Stryker usually achieves their growth in part through acquisitions. The process of integrating a smaller company into the parent company is hard to do effectively and can bring about operational errors and problems if not done correctly.
  • Supply Chain and Macro Environment: A lot of their business has a lot of exposure to China, Eastern Europe, and other parts of the world, and disruptions in that part of the world could negatively affect their performance, sales, and supply chains.
  • Pricing and Reimbursement Pressures: A lot of their growth stems from pricing products higher than their competitors, which may not be sustainable as governments and third-party payors push for low-cost healthcare options.

Despite these risks, Stryker’s diverse portfolio, brand loyalty, solid financials, and management expertise mean that it is well placed to handle these. Their history has shown that it is a very resilient business.

Understandability: 3 / 5

Stryker’s business model is not very easy to understand. The medical device industry is notoriously complex and has a lot of technical processes, approvals, and regulatory hurdles. The business is easier to understand on a surface level, but its inner workings are a bit harder to grasp. While their operations and financials are easy to understand, it takes a very specialized understanding to recognize their competitive advantages and how they are creating and sustaining value over time.

Balance Sheet Health: 4 / 5

Stryker’s balance sheet is relatively healthy, with low debt and a decent cash balance. They have more assets than liabilities and have enough cash to satisfy their short-term obligations. They have had consistently growing free cash flow. Their interest coverage ratio is also very high which means that they have more than enough cash to service their debt obligations. The firm has very sound financials. The only negative is that goodwill is a significant part of their equity, and that their debt has increased, but it is still not a level that should be worrying.