Stryker Still A Med-Tech King, But There Are Challengers To The Throne

It's hard to fault the long-term performance of Stryker (SYK), as the shares have a 20-year compounded rate of return (with reinvested dividends) of about 12.5% - more than doubling the return of the S&P 500 over that time. Even with these shares having modestly underperformed the broader med-tech space over the last 10 years (a byproduct of robust valuation), that "underperformance" is less than 2% and still works out to over 15% a year in annualized returns.

Stryker goes into 2021 well-positioned to benefit from procedure normalizations, as well as a return to more normal capex spending patterns on the part of hospitals. There are challenges across the business, though, and I wouldn't call the shares priced at "can't miss levels", as I see a prospective long-term total annualized return more in the mid-single-digits from these levels.

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Stryker Still A Med-Tech King, But There Are Challengers To The Throne

Stryker Has Looked A Little Mortal Lately, And The Stock Has Suffered

To be clear from the outset, the only thing that’s “wrong” with Stryker (SYK) is that the company’s past performance, and the sell-side’s endless need to find ways to goose price targets ever higher, set a pace that few companies could maintain. Then COVID-19 came along and made life considerably more challenging for a company with exposure across the spectrum of procedure counts (weighted toward elective) and capital budgets (under strain).

With more mixed performance trends, and concerns that rivals like Zimmer Biomet (ZBH) have some momentum behind them, Stryker shares have underperformed the broader med-tech space by about 20% since my last article. I still can’t really say that Stryker is “cheap”, though the multiples and prospective returns are more reasonable than they’ve been in a while, and Stryker is a name that tends to recover well after pullbacks. I am still worried about another leg down, though, and at this price I’d rather run the risk of missing out than overpaying.

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Stryker Has Looked A Little Mortal Lately, And The Stock Has Suffered

Stryker Humming Along, But Seems To Be Straining The Sell-Side

However you feel about the valuation, I don’t know how you don’t admire the money-making machine that is Stryker (SYK), and this excellent med-tech company continues to execute at a high level that most other med-techs (if not most other companies in general) could only aspire to reach. The “but” is that once you reach such a high level, feeding the Street’s insatiable appetite for “more” gets harder and harder.

Although transitioning to the next year in my model does boost my fair value assumptions for Stryker, it’s not enough to bring the shares into the realm of “cheap”. It’ll probably take a significant market washout or a real misstep from the company to drive significant derating, though a suppose it’s plausible that just a general “it’s gone as far as it can go” malaise could come into play. Whatever the case, it’s a must-follow if you care about med-tech, but it’s hard to get excited about what looks like a mid-single-digit prospective return, particularly with Stryker likely to be more on the sidelines with growth-driving M&A in the near future.

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Stryker Humming Along, But Seems To Be Straining The Sell-Side

Stryker Continues To Cut A Swath Through Med-Tech

Like one of the traction cities out of Mortal Engines, Stryker (SYK) continues to roll along, executing well with its core businesses, but also eagerly gobbling up technologies and product portfolios that management believes can aid its long-term growth prospects. While the third quarter wasn’t perfect down the line and the Wright Medical (WMGI) deal isn’t without some risk, Stryker rolls into 2020 with a lot of momentum and healthy prospects across its business.

As perhaps the best med-tech company out there now, Stryker continues to command a premium valuation. While a company with this combination of growth, organic growth, and margin power should be highly valued, I believe market outperformance increasingly relies on multiple expansion that seems less likely to me.

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Stryker Continues To Cut A Swath Through Med-Tech

Stryker Making Excellence Look Effortless

Having covered the med-tech space for about 20 years, I can tell you that what Stryker (SYK) is doing - generating consistent mid-to-high single-digit organic growth, outgrowing its end-markets across multiple markets, and serially making value-additive deals - is not at all easy. And yet, you look at the quarter-to-quarter results Stryker has been putting together under CEO Lobo and it looks almost effortless.

I have no meaningful issues with the operational performance of Stryker. There's room for the company to do better overseas, likely some opportunities for gross margin improvement, and perhaps a few signs of competitive gains against the company in neuro and extremities, but on the whole, everything is going very well. The valuation is the problem; even though I believe Stryker is the best med-tech company out there, the valuation just doesn't work for me and my portfolio needs

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Stryker Making Excellence Look Effortless

Stryker Priced Accurately For What It Is - 'The' Best Large Med-Tech

I've made no secret of my abiding respect for Stryker (SYK) and its ability to leverage M&A and disruptive internal R&D to target and deliver on above-average growth opportunities in med-tech. In the roughly seven years Kevin Lobo has been the CEO, the company has spent $14 billion on M&A but has stayed away from "scale for scale's sake" deals in favor of purchasing potentially disruptive assets like Mako, SBI, and K2M, and has managed to deliver organic growth rates (over 7% in Q1) comfortably ahead of its peer group.

Trees don't grow to the sky, but Stryker has growing room. The company is under-leveraged to Europe and emerging markets relative to its peers and Mako continues to drive share gains in knees, while trauma and neuro still offer room for growth. Valuation is still my main hang-up, as I'm not all that excited about the mid-single-digit prospective returns that the stock would seem to offer at today's prices.

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Stryker Priced Accurately For What It Is - 'The' Best Large Med-Tech

Wright Medical - No Fuss, No Drama, Just A Good Quarter

I’ve commented more than once recently that Wright Medical (WMGI) needs a run of steady, strong performance, and the March quarter was a good step in that direction. Revenue was good overall, gross margin was strong, and there wasn’t much that really needed explaining. What’s more, looking around the neighborhood, it looks like some of the competitive pressure has eased a bit, giving Wright Medical a smoother runaway to reestablishing reliable double-digit growth and its credentials as the leader in extremities.

With a quarter that offered few surprises, there’s not much to do on a modeling or valuation front, so I still think these shares deserve to trade closer to the mid-$30’s. The stock has been a little weak relative to the device space since the AAOS meeting, but I don’t see any near-term competitive concerns coming out of that meeting. While Wright Medical has earned a reputation for being more volatile than it probably should be, I do think the company is on a solid path now and represents a good GARP (“growth at a reasonable price”) set-up.

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Wright Medical - No Fuss, No Drama, Just A Good Quarter

Wright Medical Still Walking A Tightrope, But Growth Should Pick Up

Wright Medical (WMGI) has long been a challenging med-tech investment story. On the positive side, the company has been a share gainer in shoulders, still holds a strong portfolio (and market position) in foot/ankle, and is leveraged to an underpenetrated market that should support high single-digit revenue growth for some time to come. On the other hand, sales execution has been inconsistent at best, and the company is seeing renewed competitive vigor from rivals like Integra (IART) and Stryker (SYK).

On balance, I still think there’s upside in these shares from here, but management must execute on a consistent and reliable basis to build real long-term value for shareholders, and the jury is still out on whether they’re up to the task.

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Wright Medical Still Walking A Tightrope, But Growth Should Pick Up

Stryker Restores Its Growth Cred In A Big Way

Even though Stryker (SYK) had built an exceptional growth record, the shares had nevertheless underperformed going into the fourth quarter. I attribute that underperformance to worries about the company’s ability to maintain that impressive growth rate, with some investors choosing to view the supposed overtures toward Boston Scientific (BSX) as a sign of internal lack of confidence at Stryker, not to mention concerns about renewed vigor at rivals like Zimmer Biomet (ZBH). With strong fourth quarter results, and robust guidance for 2019, though, it seems like those concerns are at least momentarily moved to the back burner.

Stryker remains difficult to value, as I do believe the company’s high-quality growth deserves a premium, but arguably not that much of a premium. Healthcare tends to outperform later in the economic cycle and Stryker has a lot going on for it in 2019, but it’s tough for me to want to chase the shares around $180.

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Stryker Restores Its Growth Cred In A Big Way

Penumbra Should Shine Brighter

I loved just about everything about Penumbra (PEN) except the price/upside when I last wrote about this fast-growing neurovascular med-tech company. Since then, the company has continued to sail past sell-side expectations, but the market has gotten more risk-averse and worries have cropped up about how Penumbra and its growth rate will fare in 2019 against more direct competition from Medtronic (MDT), Stryker (SYK), and other neurovascular players. With that, the shares are down about 6% and I don’t feel like I’ve missed out on all that much (particularly when Penumbra has actually slightly underperformed Medtronic and Stryker in that “risk-off” trade).

I still like this company quite a bit, though, and the growth potential in peripheral vascular may be considerably greater than expected even a year ago. Although competition is a threat, I think it is highly likely that either Medtronic or Stryker buys Penumbra at some point (with a lower, but certainly non-zero, probability of a bid from a company like Johnson & Johnson (JNJ) ), and I’m not too troubled by the robust valuation. Further risk-off behavior in the market, and a general de-rating of growth med-tech, is certainly a risk factor going into 2019, but that’s a risk I’m more and more inclined to take on with Penumbra.

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Penumbra Should Shine Brighter

AxoGen Still In The Doghouse, But The Opportunity Is Compelling

The going hasn’t gotten any easier for AxoGen (AXGN). This up-and-coming med-tech company specializing in nerve repair has spooked growth investors with regard to its revenue growth rate and investors have also grown more concerned over the possibility of more intense competition from companies like Integra (IART) and Baxter (BAX) in the nerve repair market. While all that’s been going on, there seems to have been a general shift away from higher-growth (and higher-risk) stories in the med-tech space.

I’m still bullish on AxoGen, as I believe it addresses a large and under-served market with better products, but sentiment won’t turn around overnight. The 30%-plus long-term revenue growth I expect from AxoGen is hardly conservative, but I do believe these shares can outperform as surgeons become more familiar and comfortable with the procedure/products and increase their orders in the coming years.

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AxoGen Still In The Doghouse, But The Opportunity Is Compelling

Wright Medical Coming Through With Better Performance

Wright Medical (WMGI) hasn’t delivered the most consistent track record that an investor could hope for, but once again there seems to be improving momentum in the business. Not only did this extremity-focused orthopedic company deliver a decent beat relative to third quarter expectations, but management raised guidance and it looks as though the company’s efforts to improve its sales execution in lower extremities are paying off.

Wright Medical shares have been chopping upwards since the spring of this year, and it’s a little harder to make a valuation call now. There is room for the lower extremity business to outperform on better sales execution, along with ongoing strong performance in upper extremities, and I believe the injectable form of Augment could still exceed expectations, as could the recently-completed Cartiva acquisition. Likewise, it’s at least conceivable that M&A speculation could fire up again. On the flip side, steady execution has proven elusive for the company and rivals like Stryker (SYK) aren’t going to let up.

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Wright Medical Coming Through With Better Performance

Medtronic Steps Up With A Bigger Commitment To Robotics

Differentiation is the name of the game in the spine space today, and it seems clear that Medtronic (MDT) believes in the long-term future of robotics as a disrupting and differentiating opportunity. To that end, the company announced that it will be acquiring its partner Mazor (MZOR) in an all-cash deal that will give it full control over the future development of this leading robotics platform.

Even with the expected revenue re-acceleration in 2019 driven by the upcoming Mazor X Stealth (which brings integrated navigation to the robot), I believe Mazor is getting a fair price at over 18x estimated 2019 revenue. For Medtronic, while some investors may criticize the deal as buying the cow when they had already had a good deal in place for the milk, I believe total ownership of the platform and control over the future development path is worth paying for given the need to have a differentiated platform in the spine space today.

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Medtronic Steps Up With A Bigger Commitment To Robotics

K2M Shores Up A Weak Spot For Stryker

One of the best med-tech names out there, Stryker (SYK) doesn’t have many weaknesses, but the company’s spine business has been one notable exception. With a portfolio that has been lacking in innovation or differentiation, Stryker has seen its market share in spine drift lower against the likes of NuVasive (NUVA) and Globus (GMED) in recent years. Acquiring K2M (KTWO) is a strong step in shoring up the weakness of Stryker’s spine business, and while some investors may question Stryker’s decision to “double down” in a tough business, the long-term benefits of the move could be larger than they first appear.

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K2M Shores Up A Weak Spot For Stryker

Disruptive Innovation And Generally Good Execution Driving Globus Medical

Although there was a little hiccup in June, Globus Medical (GMED) has continued to outperform in a hot med-tech market, as investors have been fired up by the company’s disruptive innovation (particularly in robotics) and prospects to leverage meaningful share gains and pull-through in the coming years. At the same time, the company’s “core” spine business has continued to gain share in what may finally be a recovering U.S. market for spine procedures.

Up close to 80% over the past year, valuation remains my biggest concern with the shares. Ongoing beat-and-raise quarters should be able to support the stock (if not drive it higher), but the stock does appear to be carrying multiples in excess of what the business can support, and I believe that ups the risk.

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Disruptive Innovation And Generally Good Execution Driving Globus Medical

NuVasive Boosted By Renewed Confidence, But Follow-Through Will Be Critical

The last couple of years have certainly highlighted that NuVasive (NUVA) has yet to outgrow its volatility, but the stronger than expected second quarter results were the sort of confidence-building results I thought these shares would need to get back some of their luster. Now the question is whether or not the company can leverage recent new product introductions to maintain that momentum and whether procedure volumes in the spine market at large can support a stronger growth outlook.

With the shares back into the high $60s, it’s tougher to make a call on NuVasive. While there are still opportunities to gain share in the spinal market, NuVasive doesn’t have the operating track record of a company like Stryker (SYK), and I certainly wouldn’t criticize investors who bought shares in the $40s thinking about cashing in and moving on. If NuVasive can deliver another quarter or two of better than expected growth, though, a fair value in the mid-$70s could very well come back into play.

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NuVasive Boosted By Renewed Confidence, But Follow-Through Will Be Critical

Taking Another Look At AxoGen After A Nasty Post-Earnings Tumble

With great multiples come great expectations, and institutional growth investors can be merciless and indiscriminate in selling out of high-multiple growth stocks that don’t quite live up to expectations (or produce beat-and-raise quarters). This was one of my biggest concerns with AxoGen (AXGN) when I wrote about the company earlier this year, and the stock got hammered after what I believe was a quite modest second quarter shortfall that didn’t seem to have much to do with end-market demand.

To be sure, AxoGen is still in many respects a “story stock”, and a story with above-average risk at that. The addressable market opportunity is large and poorly-served today, and AxoGen’s clinical results have been pretty impressive, but driving adoption of new surgical procedures is not simple (or fast), competition may yet become an issue, and expectations aren’t exactly low. Still, when factoring in the incremental opportunities from future applications like total joint replacement, this is looking more and more like a risk worth taking.

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Taking Another Look At AxoGen After A Nasty Post-Earnings Tumble

Wright Medical Getting Its House Back In Order

It’s tempting to make a “shot themselves in the foot” pun with respect to the problems Wright Medical (WMGI) got itself into over the last couple of years, but this extremities-focused orthopedics company does seem to be getting its house back in order. Not only should the approval and launch of the injectable form of Augment spur meaningful adoption growth, but the company’s shoulder business continues to perform very well, and it looks as though management has the traditional foot and ankle business back on track.

Wright Medical shares have given investors plenty of trading opportunities over the last few years, as the company has struggled to establish a consistent growth path after the Tornier deal. I believe the company is getting there, and I’ve been impressed with the company’s internal R&D engine. The shares do still seem to offer some upside, and over the long-term a buyout is still a possibility, but investors should appreciate that there is a history of inconsistent execution here.

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Wright Medical Getting Its House Back In Order

Stryker's Exceptional Growth Supports A Gravity-Defying Valuation

It’s difficult to find much comfort with Stryker’s (SYK) valuation, but the company continues to deliver exceptional financial results that at least help kick the valuation can a little further down the road. MAKO continues to drive share growth from Stryker in knee implants, while new power tools are driving strong surgical equipment growth, and the company continues to benefit from expanding penetration of interventional procedures for stroke patients.

I won’t try to justify the price Stryker is trading at today. Medical devices in general are trading well above long-term norms, but Stryker continues to deliver exceptional financial performance across its business units. I wouldn’t want to be caught without a chair when the music stops, but I know better than to assume that Stryker’s high valuation alone would prevent the shares from heading higher.

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Stryker's Exceptional Growth Supports A Gravity-Defying Valuation

Of all the things that have changed in the medical device world in the time I've followed it professionally, the improvement in the quality of care for ischemic stroke patients may be one of the notable. The field has moved from "I'm sorry, but there's nothing we can do" to the introduction of tPA (which gave patients an almost 50/50 chance if they got to the hospital early enough) and now on to stent retrievers and aspiration systems that can boost those long-term survival (with a high quality of life) to more than 50/50 as far as 24 hours away from the onset of the stroke. Even so, these newer mechanical approaches are still not used nearly as often as they should be, and that represents a key growth opportunity for mid-cap med-tech Penumbra (PEN).

Penumbra is the leader in aspiration-based thrombectomy (A Direct Aspiration First Pass Technique, or ADAPT), an emerging alternative that is faster and cheaper than stent retriever systems, but with no observable compromise in efficacy. Penumbra is almost certain to face significant competition from Medtronic (MDT), Stryker (SYK), Johnson & Johnson (JNJ), and others, but with overall market penetration below 20% and opportunities in other fields like peripheral thrombectomy, embolization, and coronary thrombectomy, there are significant revenue opportunities for Penumbra.

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Penumbra: Great Growth From A Better Mousetrap In Stroke Care