Artificial joints are a multi-billion-dollar business that is expected to keep growing as the population ages and orthopedic products continue to evolve. The American Academy of Orthopedic Surgeons recently predicted that the number of hip replacements will nearly triple over the next 25 years.
That's good news for makers of joint replacements, including Stryker Corp. (symbol SYK), which has seen its revenue increase at a 15% compound rate over the last five years. But despite growing demand for orthopedic products, the industry is facing pressure from hospitals that want to cut the cost of orthopedic devices.
Some hospitals are considering banding together to switch to contracted vendors that offer bulk discounts. So far, these arrangements haven't gained footing, but reports predicting slowing growth in the orthopedic device sector have put a damper on stock prices.
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Stryker's shares, currently $43, have fallen 9% this year. The company's price-earnings ratio has dropped quite a bit since 2004 -- another indication that the market is no longer knee-jerk enamored of the company.
Even if Stryker isn't able to raise its prices as much as it has in the past, the company's key advantage over competitors is diversification, says a report from Zacks Investment Research, which recently upgraded the stock to a "buy" rating. Of the major orthopedic manufacturers, Stryker is the least directly exposed to the implant market, with joint replacements making up only about a third of sales.
Stryker's other business segments are surgical equipment manufacturing and physical therapy services. In 2005, revenues from surgical-device sales increased 21%, while sales from physical therapy services grew 7%. It also has some research projects in the biotechnology area.
And Stryker adds to its portfolio of products through acquisitions. At the end of 2005, the company bought PlasmaSol, a producer of low-temperature sterilization equipment, for $17.5 million. In March, Stryker struck a $50 million deal to purchase Sightline Technologies, an Israel-based manufacturer of flexible endoscopes. The buying spree will likely continue. "Stryker's balance sheet is in excellent condition, so acquisitions are a constant possibility," says the Zacks report.
At $43, Stryker trades at 21 times estimated 2006 profits of $2.02 per share and 18 times estimated 2007 profits, according to Thomson First Call. Zacks' six-month price target for the stock is $53. In 2006, the company expects revenues to grow between 11% and 14% and predicts that earnings will grow at least 20%, its perennial target and the number that's made the company a favorite of growth-stock investors for a long time.
-- Katy Marquardt
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