Last week Stryker reported first-quarter results that were a bit shy of expectations on the top and bottom lines. Guidance for the year was reiterated, but it appears more second-half loaded than previously expected and Street estimates will likely come down slightly, as a result.
The primary source of the revenue and EPS shortfall, in our opinion, was some disruption within the company’s newly acquired MAKO business. Management indicated that it believes it has fixed the issue and that the group is poised to drive improving results throughout the remainder of the year. While the business will likely continue to scuffle in the near term, the company anticipates launching a total knee system from the MAKO platform in 2015, which should accelerate growth and improve the company’s competitive position in this space.
Hip and knee sales were up 4.9% and 2.3% on a constant-currency basis, respectively, which fell short of our targets. While the organic performance is a bit disappointing, weather served as a headwind and resulted in a number of canceled surgeries that we anticipate will be rescheduled in the coming quarters. In addition, there are still several high-growth segments within the recon business (extremities and trauma) that we believe will continue to buoy the overall revenue performance.
The company’s MedSurg business was up a healthy 6.8% on a constant-currency basis, despite an increasingly challenging capital spending environment, which leads us to believe that the broad Stryker product offering helps to insulate it somewhat from negative market trends, a valuable factor of the story that we believe is often overlooked by investors. In addition, the company reclassified its sports medicine business to fall in endoscopy and recently purchased Pivot to round out its portfolio here; we believe that this segment could represent a significant growth driver for the company longer term.
Given the company’s diversified platform and earnings power, we continue to encourage investors to use the name at what we view as a reasonable multiple of 14.8 times the consensus 2015 EPS target.