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Stryker is Overdelivering

It’s striking to me that medical device manufacturer Stryker (SYK) is up 25% in the last year. Profits have grown an average of 12.5% the last 4 qtrs — just 5% and 11% the past 2 qtrs — yet the stock keeps breaking out and running higher. The P/E is 20. Isn’t that high? I used to own this stock many years ago — and sold it because profit growth slowed below 20% a year. So why is this stock climbing?

Stryker has a perfect blend of growing a little bit, paying an unexciting dividend of 1 1/3%, acquiring other medical device companies, and buying back stock. Still, the estimated long-term profit growth rate is just 9% and if you tack on the dividend you get a 10% total return (estimated). Selling for 20 times earnings.

Well if you look at the bright side SYK has a lot going for it. Domestic sales account for 68% of total sales, so the company isn’t that impacted by a strong dollar. Stryker also earns Value Line’s top rank of 1 for safety, which kicks the P/E up a notch. Stryker is growing organically at 6% per year, twice the rate of the rest of the medical technology market, and has had 35 straight years of sales growth. It’s beating the street by a bit and then upping estimates. Management also makes a lot of acquisitions and buys back stock, this can’t be underestimated.

Ten Year Chart

SYK_2015_Q3_10yrHere’s the ten-year chart of Stryker. Didn’t look pretty around five years ago. I think the stock snuck up on us. I think SYK’s steadiness is impressing investors, especially value investors who are getting hurt from other value stocks due to the strong dollar.

Last qtr the company beat the street by just 3 cents, and had 2015 profit estimates upped by just 7 cents. Investors liked it as the stock broke out to an All-Time high.

Profit History

SYK_2015_Q3_PHStill, I think this stock is worth 17 times earnings, not 20. Stryker just got a little ahead of itself. The stock had an average P/E of 16 between 2009 and 2013. Now its 20. Yet profits are expected to climb just 8% this year..

Sharek’s Take

Stryker is a conservative medical device stock that should perform well regardless of the economy. It’s known for its replacement hips and hospital beds — which are always in need. It’s nice how management is executing in a tough environment — even upping estimates in the face of a strengthening dollar — but at 20x earnings I feel SYK is a bit rich. If you own the stock already, continue to hold for the long-term. If not I would wait patiently for a better entry point.

View the One Year Chart here.
View the Earnings Table here.

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