Elevating Future Success Through Organic Growth, Calculated Acquisitions, And Innovation

Key Takeaways

• Continued expansion in market presence through organic sales growth, notably in MedSurg, Neurotechnology, Orthopaedics, and Spine sectors.
  
• Strategy focused on expanding Mako robot installations globally and executing strategic acquisitions to drive growth and diversify product offerings.
  
• Stryker faces challenges such as slowed international growth, pricing pressures, delayed benefits from new products, reliance on high procedure volumes, and risks from Mako installations' utilization rates.

Catalysts

Operates as a medical technology company.

• Continued organic sales growth, particularly from double-digit growth in MedSurg and Neurotechnology and high single-digit growth in Orthopaedics and Spine, indicating an expanding market presence which should positively impact future revenue.
  
• Expansion of Mako robot installations, both in the U.S. and internationally, with a record number of installations in the first quarter. This sustained increase in installations is expected to continue driving growth in the Hips and Knees businesses, thus bolstering future revenue.
  
• Acceleration of M&A activity with the completion of strategic acquisitions such as mfPHD and SERF, enhancing the company's product portfolio, which is likely to contribute to revenue growth and diversification.
  
• Strong deal pipeline expected to be active over the course of the year, indicating ongoing strategic acquisitions that could further drive growth in key areas and enhance overall earnings.
  
• Commitment to operating margin expansion with an anticipated increase of 200 basis points by 2025, suggesting improvements in operating efficiency that could lead to higher net margins and earnings growth.

Assumptions

• Analysts are assuming Stryker's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.0% today to 18.7% in 3 years time.
• Analysts expect earnings to reach $4.9 billion (and earnings per share of $12.84) by about July 2027, up from $3.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.3 billion in earnings, and the most bearish expecting $4.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.6x on those 2027 earnings, down from 37.9x today. This future PE is lower than the current PE for the US Medical Equipment industry at 36.3x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Risks

• International growth experienced a slowdown, especially in Europe due to tougher comparables, potentially impacting future revenue growth expectations in these regions.
  
• Pricing headwinds, particularly in the Orthopaedics and Spine segment, presented ongoing challenges, possibly affecting net margins.
  
• The anticipated impact of new product launches like Pangea and LIFEPAK may not materialize until later in the year, presenting risks to expected revenue and earnings growth in the near term.
  
• High expectations for Mako installations driving future growth may face challenges in maintaining elevated utilization rates, especially internationally, potentially limiting expected revenue contributions from new markets.
  
• Reliance on continued robust procedure volumes and capital equipment demand may be at risk if market conditions fluctuate, potentially impacting overall revenue growth projections.

Valuation

• The analysts have a consensus price target of $372.75 for Stryker based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $406.0, and the most bearish reporting a price target of just $242.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $26.3 billion, earnings will come to $4.9 billion, and it would be trading on a PE ratio of 35.6x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $334.64, the analyst's price target of $372.75 is 10.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.