Stryker has been under a microscope over the past few months, whether it's rumors the company will acquire London-based Smith & Nephew or reports that director Ronda Stryker sold another batch of company stock.
The orthopedic device market is in flux this year, with two large companies making acquisitions to rival industry giant — and current leader — Johnson & Johnson with DePuy Synthes. Stryker so far has taken a different approach; the company has acquired several smaller companies over the past year, including Small Bone Innovations and MAKO Surgical.
For the third quarter, the company reported $2.4 billion net sales, which were unfavorably impacted 2.3 percent due to price changes. The company's net earnings were down 44.7 percent in the third quarter, only reaching $57 million. The reported net earnings include charges from Rejuvenate, ABG II and Neptune recalls as well as tax impacts related to the European regional headquarters establishment.
When the financial results came out, Stryker stock traded down 0.2 percent with a trading value of 2.2 million shares and a market cap of $30 billion. But a Forbes report argues the company is undervalued at approximately $84 per share. According to the report, investors should focus on operating profit instead of net income; last year the operating profit exceeded GAAP net income by more than $1 billion, according to the report.
"We expect these charges to be much lower in the future as the company has already taken large reserves for the hip replacement recall and has resolved the issues with its Neptune systems," according to the Forbes report.
The Forbes report also argues the company created value with recent acquisitions and kept free cash flow positive — at $205 million last year. And Stryker has a huge potential for growth in international markets, including China where the company purchased Trauson Holdings last year.
But perhaps the most instructive insight into the company's future comes from Chairman and CEO Kevin Lobo, who discussed the third quarter financial report in a conference call reported by Seeking Alpha. Here are eight key conclusions from the report:
1. There was slow growth in the spinal implant market with both the United States and international markets delivering high single-digit year-over-year organic growth. The company is focused on making upgrades to their portfolio to add more minimally invasive products to the mix.
2. MAKO sales are still pacing below the target, but the company's pipeline development is "encouraging." Mr. Lobo also praised the company's clinical progress with the technology. The final stages of integrating MAKO selling organization into Stryker's recon sales force will occur in the fourth quarter.
3. The company is creating a European headquarters, which will allow Stryker to repatriate around $2 billion of O-U.S. cash throughout next year. The company officially opened the new headquarters in Amsterdam.
4. Stryker developed and is expanding a flexible financing offering that Katherine Own, VP Strategy and IR, says "hospitals will find attractive," to leverage their expertise in the area.
5. Enrollment in the company's total knee trail is complete and the company is on course for FDA approval next year.
6. Early integrate with sales tracking is ahead of expectations with Small Bone Innovations; more than 100 Stryker reps are now on the STAR Ankle and various other SBi products. The company hopes to have more than 200 reps trained and selling the STAR Ankle and more than 400 selling SBi's upper extremities products when training is complete.
7. Research and development expenses in the quarter were 6.4 percent of sales, which was slightly higher than last year. The higher spending is related to recent acquisitions.
8. The company transferred intellectual property from other countries within Europe to the Netherlands, which provides the company with more flexibility in managing operations in the future and aligns the company with the primary European leadership team. "This project will also generate some ongoing tax benefits, which as we mentioned previously, are expected to further reduce overall adjusted operating tax rate in 2015 by approximately two full percentage points," said Bill Jellison, VP and CFO of Stryker.
Mr. Lobo also addressed physician-owned distributorships, which have been a huge disruptor in the spine field. "For every POD that goes away, new PODs seem to pop up, it seems to be pretty stable overall," he said. "The fact that there is some prosecution will hopefully turn that tide. We haven't seen that trend turn yet."