Maintaining its streak of positive earnings surprises, Stryker Corporation SYK reported second-quarter 2018 adjusted earnings per share of $1.76, beating the Zacks Consensus Estimate by 1.7%. Earnings improved 15% year over year and also exceeded the high end of the company’s guided range.

Meanwhile, shares of Stryker have rallied 18.6% compared with the industry’s rise of 13.1% in a year’s time.

The stock carries a Zacks Rank #4 (Sell).

Revenue Details

The Michigan-based medical device company reported revenues of $3.32 billion, beating the Zacks Consensus Estimate of $3.31 billion by a narrow margin. Revenues shot up 10.3% on a year-over-year basis and 9.9% at constant currency (cc).

Per management, organic net sales increased 7.9% in the quarter.

Revenue by Geography

Revenues in United States came in at $2.39 billion, up 9.3% at cc, while international sales rose 11.3% to $937 million. U.S. organic sales growth was 7% and international organic sales improved 10.2%.

Per management, emerging markets grew double digits. The company also recorded solid sales in Canada, Europe and Japan.

Stryker Corporation Price, Consensus and EPS Surprise

 

Stryker Corporation Price, Consensus and EPS Surprise | Stryker Corporation Quote

Segment Details

Stryker reports through three segments — Orthopaedic, MedSurg and Neurotechnology & Spine.

Orthopaedic

In the quarter under review, revenues in the segment totaled $1.23 billion, up 6.6% at cc. Per management, the segment saw organic growth of 7% on strength in knees and trauma and extremities. The company’s Mako momentum continues with over 550 robots installed globally.

MedSurg

This segment reported sales worth $1.46 billion, up 9.2% at cc. Per management, the segment grew 7% organically in the quarter, led by strong instruments performance. Notably, instruments revenues improved 12.6% at cc.

However, sustainability revenues slowed down. Per management, supply issues in the Puerto Rico facility have partially offset growth in the segment.

Neurotechnology & Spine

Sales in the segment grossed $639 million, improving 18.5% at cc. Per management, the upside can be attributed to Neurotechnology growth of 23.1% and Spine organic growth of 9.5%.

Margins

In the second quarter, gross profit totaled $2.19 billion, up 10% from the year-ago quarter. Gross margin was 65.9%, down 20 basis points (bps).

Operating income totaled $672 million, which climbed 33.9% from the prior-year quarter. Operating margin was 20.2%, up 350 bps.

Balance Sheet

Stryker exited the second quarter with $1.9 billion of cash and marketable securities. However, total debt remained unchanged at $7.2 billion.

Cash flow from operations was $946 million.

Guidance

For 2018, Stryker expects organic net sales growth within 7-7.5%.

Adjusted earnings per share are anticipated within $7.22 to $7.27. Notably, the Zacks Consensus Estimate for earnings is pegged at $7.22, coinciding with the low end of the guidance.

For the third quarter of 2018, earnings are projected within $1.65 to $1.70. The consensus mark for earnings is pinned at $1.70, at the high end of the guided range.

Our Take

Stryker wrapped up the second quarter on a solid note, with earnings and revenues beating the consensus mark. The company continues to gain from its flagship Mako Total Knee platform, which drove its core Orthopaedic segment. In fact, the company witnessed solid growth in Mako robot installations in the quarter. Surging domestic sales is a positive. Moreover, solid performance in emerging markets and Europe paints a bright picture. Considerable expansion in operating margin is encouraging as well. Higher R&D expenses indicate increasing focus on innovation.

On the flip side, a declining gross margin raises concern. The company’s debt remains unchanged, which adds to the woes. Supply issues in the Puerto Rico facility continue to plague the company. The slowdown of MedSurg’s sustainability revenue growth is another negative. Stiff competition is likely to mar Stryker’s prospects.

Key Picks

A few better-ranked stocks in the broader medical space are Masimo Corporation MASI, Align Technology, Inc. ALGN and Integer Holdings Corp ITGR.

Align Technology is expected to release second-quarter 2018 results on Jul 25. The Zacks Consensus Estimate for adjusted earnings per share is $1.09 and the same for revenues is $469.2 million. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Integer Holdings is slated to release second-quarter 2018 results on Aug 2. The Zacks Consensus Estimate for adjusted bottom line is 90 cents and the same for the top line is pinned at $381.8 million. The stock sports a Zacks Rank #1.

Masimo is scheduled to release second-quarter 2018 results on Aug 1. The Zacks Consensus Estimate for adjusted earnings per share stands at 72 cents, while the same for revenues is pinned at $208 million. The stock carries Zacks Rank #2 (Buy).

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