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Running head: RESEARCH PAPER 1

Research Paper

XXXXXXXXX

Davenport University

FINC 620

Professor James Garvin

October 16, 2012

Running head: RESEARCH PAPER 2

Table of Contents

Overview of Stryker Corporation....................................................................................................3

Stryker’s 2011 Financial Statements...............................................................................................5

Stryker’s Income Statement.........................................................................................................5

Stryker’s Balance Sheet...............................................................................................................6

Stryker’s Cash Flow Statement....................................................................................................7

Stryker’s Statement of Owners’ Equity.......................................................................................8

Summary of Stryker’s Financial Statements...................................................................................9

Ratio Calculation and Analysis.....................................................................................................11

Stryker’s Key Statistics..................................................................................................................19

Forecast of Several Key Variables................................................................................................21

Other Information..........................................................................................................................23

Recommendation Regarding the Future of Stryker.......................................................................26

References......................................................................................................................................27

RESEARCH PAPER 3

Overview of Stryker Corporation

Stryker Corporation (Stryker) is a medical device, implant, instrument and technology

company that includes a variety of divisions and products. They employ over 21,000 people

worldwide, sell their products in over 100 countries, have 14 division headquarters, have 29

manufacturing and R&D locations, and have three other locations (Company Overview, 2012, p.

6). The company was founded by Dr. Homer Stryker in 1941 (Company Overview, 2012, p. 3).

The three main divisions of Stryker are the Reconstructive, Medical & Surgical, and

Neurotechnology & Spine. The Reconstructive division consists of hip and knee implants,

trauma and extremities hardware, foot and ankle hardware, joint preservation devices, and

orthobiologics and biosurgery equipment. The Medical & Surgical division is made up of power

tools and surgical accessories, computer-assisted surgery devices, endoscopic surgical

instruments, integrated communication devices, stretchers, beds and EMS equipment, and

reprocessing and remanufacturing techniques. The Neurotechnology & Spine sector is

comprised of craniomaxillofacial implants, interventional spine devices; neurosurgical, spine and

ENT instruments; neurovascular equipment, and spinal implants (Company Overview, 2012, p.

4-5).

Worldwide, Stryker owns about 37% of the market share for the Reconstructive division,

48% of the market share for the Medical & Surgical division, and 16% of the Neurotechnology

& Spine division (Owens & Becker, 2012, p. 14). They also conduct about 37% of their sales

outside the U.S. (Owens & Becker, 2012, p. 11). This makes Stryker a large multinational

corporation.

RESEARCH PAPER 4

The new President and CEO of Stryker was announced on October 1, 2012 and is Kevin

A. Lobo (Weaver & Lublin, 2012). Lobo has been with Stryker since April 2011. Prior to that

he spent nine years with one of Stryker’s top competitors, Johnson & Johnson. The 8-K SEC

filing describes the details of Lobo’s personal work history and current base salary at Stryker

Corporation which is $1 million annual with a targeted annual bonus of 130% of the base salary

in addition to various stock options (“Departure of Officers,” 2012). The Interim Chief

Executive Officer and Vice President and Chief Financial Officer of Stryker was Curt R.

Hartman. Hartman took over on February 8, 2012 when the then current President and CEO of

Stryker, Steve MacMillan, resigned (The Innovation Advantage: Stryker, 2011, p. 5). The

company headquarters is in Kalamazoo, Michigan and Stryker has sites in North and South

America, Europe, the Middle East, Africa, Asia, and the Pacific ("Stryker Worldwide Sites,"

2010). There are other division headquarters located throughout the world. Stryker’s IPO was

on May 2, 1979 with NASDAQ. On July 24, 1997 Stryker moved from NASDAQ to the NYSE

("Company History," 2011).

With its vast array of products, Stryker is a large contender in the medical technology

sector. Some of their top competitors are Johnson & Johnson’s DePuy Orthopedics Inc., Zimmer

Holdings Inc. (Zimmer), Biomet Inc., and Smith & Nephew. Biomet and DePuy are both

privately held companies. Between Zimmer and Smith & Nephew, Zimmer is the most similar

in product divisions to Stryker. Therefore throughout this paper, Zimmer will be used as a

benchmark comparison.

RESEARCH PAPER 5

Stryker’s 2011 Financial Statements

Table 1

Stryker’s Income Statement

From “Stryker Corporation and Subsidiaries: Consolidated Statements of Earnings,” 2011, Stryker Corporation 2011 Annual Report, p. 20.(Dollar amounts in millions except per share amounts or as otherwise specified.)

RESEARCH PAPER 6

Table 2

Stryker’s Balance Sheet

RESEARCH PAPER 7

From “Stryker Corporation and Subsidiaries: Consolidated Balance Sheets,” 2011, Stryker Corporation 2011 Annual Report, p. 21.(Dollar amounts in millions except per share amounts or as otherwise specified.)

RESEARCH PAPER 8

Table 3

Stryker’s Cash Flow Statement

From “Stryker Corporation and Subsidiaries: Consolidated Statements of Cash Flows,” 2011, Stryker Corporation 2011 Annual Report, p. 23.(Dollar amounts in millions except per share amounts or as otherwise specified.)

RESEARCH PAPER 9

Table 4

Stryker’s Statement of Owners’ Equity

From “Stryker Corporation and Subsidiaries: Consolidated Statements of Shareholders’ Equity,” 2011, Stryker Corporation 2011 Annual Report, p. 22.(Dollar amounts in millions except per share amounts or as otherwise specified.)

RESEARCH PAPER 10

Summary of Stryker’s Financial Statements

According to Stryker’s income statement shown in Table 1, total revenues in 2011 were

$8.307 billion while cost of goods sold was $2.811 billion, leaving a gross profit margin of

$5.496 billion or 66.16 percent of total revenue. Total operating expenses were $3.810 billion,

or 45.86 percent of total revenue, leaving $1.686 billion in EBT. After taking out taxes, the net

income was $1.345 billion, or 16.19 percent of total revenues. Diluted EPS of common stock

was $3.45, and total shares outstanding for diluted stock was 389.5 million.

Referring to Table 2 which shows Stryker’s balance sheet, total assets were $12.405

billion. Current assets were $7.211 billion in 2011, or 58.13 percent of total assets. The net for

property, plant and equipment was $.888 billion, or 7.16 percent of total assets. Goodwill

accounted for $2.072 billion, or about 16.7 percent of total assets. Other intangibles, which

would included Stryker’s patents, was at $1.442 billion or 11.62 percent of total assets. Focusing

on the current asset categories, cash and cash equivalents were $905 million, which accounts for

12.55 percent of current assets. AR was $1.417 billion in 2011, which is about 19.65 percent of

current assets. As for a non-operating expense, marketable securities was at $2.513 billion, or

about 34.85 percent of current assets. Total inventories, which includes raw materials, works in

progress and finished goods, totaled $1.283 billion, which is 17.79 percent of current assets.

On the other side of the balance sheet equation, cumulative liabilities for 2011 were

$4.722 billion, or about 38.07 percent of liabilities plus owners’ equity. Current liabilities were

$1.828 billion in 2011, or 38.71 percent of total liabilities. Long-term debt was about $1.751

billion and accounted for about 37.08 percent of total liabilities. Total shareholders’ equity was

$7.683 billion, or about 61.93 percent of liabilities plus owners’ equity. Retained earnings were

RESEARCH PAPER 11

$6.479 billion in 2011, or about 84.33 percent of total shareholders’ equity. Liabilities plus

owners’ equity was $12.405 billion, which is equal to the total assets amount of $12.405 billion.

As referenced in Table 3 which shows Stryker’s statement of cash flows for 2011, net

earnings were $1.345 billion, which is in accordance with the amount of net earnings listed on

the income statement. Net cash from operating activities was $1.434 billion. Cash used in

investing activities was $2.135 billion. Looking at a non-operating asset, the net profit earned on

marketable securities was $90 million, or about 1.33 percent. For financing activities, $161

million of cash flows was used. Since Stryker is a global company, they have to deal with

exchange rates. Stryker made $9 million in 2011 from exchanging currency. Cash and

equivalents at the beginning of the year was $1.758 billion and at the end of the year was $905

million.

Table 4 shows Stryker’s statement of equity for 2011. Again listed net earnings for 2011

were $1.345 billion, which is in alignment with the income statement and statement of cash

flows. There was an issuance of 1.6 million shares of common stock. Cash dividends were

$0.75 per common stock share. There was also a repurchase of 11.8 million shares of common

stock. There was a final balance of $6.479 billion in retained earnings in 2011. This is in

congruence with the retained earnings amount listed on the balance sheet.

RESEARCH PAPER 12

Ratio Calculation and AnalysisTable 5

Five Fiscal Years of Financial Ratios: Stryker Corporationa vs. Zimmer Holdings, Inc.b

Financial Ratios 2011 2010 2009 2008 2007Liquidity of Short-Term Assets

Current Ratio Stryker 3.945 4.755 4.061 3.406 3.680 Zimmer 3.779 4.284 3.964 2.825 2.782Cash Ratio Stryker 1.870 2.729 2.051 1.502 1.809 Zimmer 1.411 1.330 1.098 0.276 0.620Quick Ratio Stryker 3.243 4.096 3.406 2.754 3.082 Zimmer 2.706 2.951 2.642 1.621 1.810

Long-term Debt-paying AbilityDebt Ratio Stryker 38.07% 34.16% 27.30% 28.89% 26.86% Zimmer  35.33% 27.86% 27.57% 21.95% 17.85%Debt-equity Ratio Stryker 0.615 0.519 0.375 0.406 0.367 Zimmer  0.546 0.386 0.381 0.281 0.217Times Interest Earned Stryker n/a n/a n/a n/a n/a Zimmer n/a n/a n/a n/a n/a

ProfitabilityProfit Margin (Net Income/Sales) Stryker 16.19% 17.40% 16.47% 17.08% 16.96% Zimmer 17.09% 14.14% 17.52% 20.59% 19.84%ROA (Net Income/Assets) Stryker 10.84% 11.68% 8.93% 9.50% 8.77% Zimmer   9.26% 6.94% 8.42% 10.35% 9.37%ROE (Net Income/Shareholder Equity) Stryker 17.51% 17.74% 14.41% 15.19% 13.08% Zimmer  13.22% 10.56% 13.03% 15.15% 12.85%

Asset Utilization/Management Efficiency

RESEARCH PAPER 13

Total Asset Turnover Stryker 0.670 0.672 0.542 0.556 0.517 Zimmer 0.363 0.339 0.330 0.341 0.336Inventory Turnover Measures Stryker 6.475 6.925 5.240 5.180 4.672 Zimmer 4.657 4.504 4.405 4.256 3.997Accounts Receivable Turnoverc

Stryker 6.2 6.1 5.9 6.2 6.2 Zimmer 5.5 5.5 5.5 5.9 6.0

Market MeasuresPrice/Earnings Ratioc

Stryker 14.4 16.8 18.2 14.4 30.6 Zimmer 13.3 18.1 17.8 10.9 20.3Earnings Per Common Sharec

Stryker $3.48 $3.21 $2.79 $2.81 $2.48 Zimmer  $4.05 $2.98 $3.34 $3.73 $3.28Dividend Payout Ratioc

Stryker 22% 20% 9% 14% 9% Zimmer 0 0 0 0 0aExcept for most of Stryker 2011 data and where indicated, data is from "Stryker Corp," 2012.bExcept where indicated, data is from "Zimmer Holdings Inc," 2012.cData for Stryker from "Stryker," 2012 and data for Zimmer from "Zimmer," 2012Note: 2011 Stryker data is calculated from “Stryker Corporation and Subsidiaries: Consolidated Statements of Earnings,” 2011, Stryker Corporation 2011 Annual Report, p. 20 and “Stryker Corporation and Subsidiaries: Consolidated Balance Sheets,” 2011, Stryker Corporation 2011 Annual Report, p. 21.

In reviewing the statistical financial ratios in Table 5 above, Stryker and the benchmark

company Zimmer are pretty similar in most areas. For 2011, Stryker has current liabilities of

$1.828 billion as seen in Table 2. Looking at the liquidity ratios, it doesn’t seem as though they

will have a problem paying that off in the upcoming year. Stryker has a higher current ratio than

the benchmark company, Zimmer. It is not significantly high enough to cause concern. Stryker

doesn’t have an excess amount of cash tied up in non-operating assets. And as seen in the

financial statements, only 17.8 percent of total current assets was invested in inventory in 2011,

so it doesn’t seem as though there is a problem there. A high current ratio is actually seen as a

RESEARCH PAPER 14

positive sign by creditors. It means that both companies can support their short-term debts.

However both companies’ ratios are on the higher side of average, but still within range for their

industry. If they increase, one should investigate efficiency, short-term financing capabilities,

and management of working capital. Over the last five years, Stryker’s current ratio has risen

and fallen, but is settling back to its 2007 level. The large decrease from 2010 to 2011 is

something to watch. If the ratio continues its steep decline, this could be an indicator that they

are having problems paying off their short-term debts. However, the lower current ratio is a

positive sign for the shareholders.

Stryker’s cash ratio is also higher than Zimmer’s (1.87 vs. 1.41), but relative to cash

ratios in general, both are pretty high. A cash ratio of less than 1.0 is usually ideal. Zimmer had

great cash ratios in 2007 and 2008, but they have been on the rise since then. The higher cash

ratios for these two companies in 2011 could mean that both companies are holding onto too

much cash. They could be losing out on interest income by doing this. Again, historically

Stryker’s cash ratio has gone up and down and is back near the 2007 level. This is a good sign

and hopefully next year’s data will continue to show a decrease.

Finally, Stryker’s quick ratio was about 3.2, which is higher than Zimmer’s ratio of about

2.7. Both ratios are above 1.0 and this could indicate that companies are growing steadily. The

current ratios are not significantly higher than the quick ratios for either company, which again

shows that their current assets are not heavy in inventory. Being that the technology field has

rapid changes and developments, it is not a good idea for this company to hold onto any old

inventory. They don’t want to end up with obsolete stock when the next new product is

developed. Stryker’s quick ratio was on the rise since 2008, but again is coming back down to

RESEARCH PAPER 15

its 2007 level. Again it will be good to keep an eye on this ratio and make sure it doesn’t fall too

low making this company a risky investment.

Switching over to some long-term debt ratios, Stryker’s debt ratio (38.07%) is slightly

higher than Zimmer’s (35.33%). Both of their percentages are in the mid to high 30’s, and this

indicates that the companies are doing well and are not reliant on being in debt. Although

Stryker’s debt ratio is a little on the high side, the company has been well-established and

doesn’t seem to be too in-debt. Stryker’s debt ratio has for the most part been on the rise since

2007. This is good for stockholders, but creditors may be keeping an eye on these increasing

values.

Both companies’ debt-equity ratios are less than 1.0, with Stryker’s at 0.615 and

Zimmer’s at 0.546. This means that most of their assets are financed through equity. For

example, Stryker has $0.62 of debt for every dollar of equity. This ratio has also been on the rise

for Stryker when compared to 2007. Again this is viewed as an opportunity for stockholders.

Neither Stryker nor Zimmer had interest expenses listed on their income statements, so

times interest earned could not be calculated.

In examining profitability, Stryker’s profit margin for 2011 was 16.19 percent and

Zimmer’s was 17.09 percent. These rates are pretty good for the industry. Medical technology

can be a costly undertaking. To put it in perspective, Stryker makes about $0.16 for every dollar

that it sells. Stryker’s profit margin has remained relatively stable since 2007, while Zimmer’s

took a hit after 2008. Stryker’s profit margin is at its lowest since 2007, but not significantly low

enough at this point to cause concern. An investor would be wise to keep a watchful eye on this

statistic to make sure it doesn’t decline further in 2012.

RESEARCH PAPER 16

Turning to ROA, Stryker’s was 10.84% in 2011 and Zimmer’s was 9.26%. These are

very similar to each other and also about the same or better than others in the industry. Over the

last five years, Stryker’s ROA has risen and fallen but appears to be on the increase. They don’t

overuse debt based on the previous findings, so this is consistent with the other figures.

Looking at the ROE, there was a bit more separation between Stryker and Zimmer.

Stryker’s ROE was 17.51 percent in 2011, and Zimmer’s was 13.22 percent. Stryker’s ROE is

better than the benchmark and better than the average industry rates. Stryker’s ROE overall has

been on the rise since 2007. Shareholders should be satisfied that their money is well-invested

and earning a good profit.

It would also be good to look at return on invested capital (ROIC) when examining

profitability ratios. Stryker has been efficient when investing in projects (R&D), land, buildings

and equipment. From 2007 to 2011, its ROIC was 23.28%, 25.87%, 28.43%, 27.81% and

16.87% (“Excellent Cash Return’” 2012). This is great for a medical technology company like

Stryker that has to invest a lot of its assets in research and development. Typically firms with

high costs from R&D also have higher fixed costs and thus high operative leverage (Ehrhardt &

Brigham, 2011, p. 604).

Next there are the asset utilization and management efficiency ratios. Stryker had a total

asset turnover ratio of 0.67 in 2011, compared to Zimmer’s 0.36. The increase of this ratio since

2007 is a good sign. But Stryker’s ratio, even though higher than Zimmer’s, still has some room

for improvement. Perhaps some assets could be sold and/or sales increased.

Inventory turnover measures were 6.475 for Stryker compared to 4.657 for Zimmer in

2011. This means that Stryker sells off its entire inventory and restocks it about 6.5 times per

year. This is good again considering that there is a lot of technology involved in their products

RESEARCH PAPER 17

that can become obsolete quickly, so they don’t want to hold onto their inventory too long. This

rate has been increasing for the most part over the last five years, and this should be viewed as a

positive sign for the company especially when compared to the benchmark company.

Next, looking at the accounts receivable turnover data, Stryker is at 6.2 and Zimmer at

5.5 so again Stryker comes out on top here. This is one ratio that has remained fairly consistent

for both companies over the last five years. Typically it would be ideal to get this ratio higher,

but these companies sell large capital items that tend to require most purchasers to use long-term

financing. If Stryker attempts to aggressively seek a higher ratio here, they could lose out on

large sales.

When looking at efficiency ratios, it is always good to also take a look at the cash

conversion cycle (CCC). Though not listed in Table 5, CCC can be calculated from Stryker’s

financial statements. For 2011, Stryker’s CCC is 184.05. This number, like the other ratios,

needs to be evaluated in context with past figures. Stryker’s CCC ratios from 2006 to 2010 are

150, 155, 166, 180, and 182 (Jayson, 2012). This looks pretty bad. But as Jayson (2012) points

out, businesses tend to be cyclical and Stryker’s CCC ratios really need to be viewed on a

quarterly basis as well. Table 6 shows the quarterly breakdown of Stryker’s CCC ratios from

2010 and 2011. The different cycles can be viewed from this data and the average CCC looks

better here than the annual data. So the cash conversion cycle for Stryker is mixed (Jayson,

2012). Zimmer’s CCC levels have bounced around in the mid 400’s for the past few years and

settled at about 418 at the end of 2011 (“Zimmer Holdings, Inc. Operating Efficiency,” 2011).

So in comparison, Stryker’s CCC is much better than the benchmark company’s, although there

is some room for improvement. There is a definite relationship between CCC and stock price,

RESEARCH PAPER 18

and if Stryker can drop even 10 days off of its CCC it could increase its profit margin (Ehrhardt

& Brigham, 2011, p. 653).

Table 6

Stryker’s Quarterly CCC Ratios—2010 & 2011

From “Stryker What Stryker's Earnings Headlines Didn't Tell You,” 2012.

Moving along to market measures, Stryker’s PE ratio was 14.4 in 2011, compared to

Zimmer’s 13.3. This puts Stryker at or above the industry levels suggesting investors view the

company as a high growth firm with less risk. To put this into perspective, it means that

investors will pay $14.40 for every dollar of earnings. Both companies have of course seen a

huge drop in their PE ratios since 2007, but that is not surprising.

RESEARCH PAPER 19

In looking at earnings per common share in 2011, Stryker was at $3.48 and Zimmer was

at $4.05. So Stryker is below the benchmark but has improved over the past five years by one

dollar per share. It is always a good sign to see an increase in the earnings per share amounts.

As for the dividend payout ratio, Stryker was at 22 percent in 2011. Zimmer does not

pay a dividend and so does not have a comparable statistic for this category. Stryker has steadily

increased this over the last five years, minus a slight drop in 2008. This means for every dollar

that Stryker earns, it pays its shareholders $0.22 in dividends. Stryker has got their payout ratio

set at a good amount. It is not too low which would indicate that too much of the profit is being

kept by the company for retained earnings. But it is also not too high which indicates Stryker is

probably not a slow-growth company. This rate could continue to increase into the 30% range

without causing any alarm. But if it starts to get much higher than this or much lower than its

current rate, the investor may want to consider further investigation of the company’s profits.

It helps to correlate this ratio analysis with a deeper look into the statement of cash flows

helps to better understand Stryker’s financial position. The statement of cash flows reveals that

Stryker’s AR increased by $111 million from 2009 to 2010, and then increased again by $31

million from 2010 to 2011. That is a 27.9 percent increase in AR for the past two fiscal years.

Stryker spent $166 million on inventory in 2011. This was an increase of $35 million from

2010. From 2009 to 2010, there was a $165 million increase in inventories. This is about a 21.2

percent increase in inventories for the past two fiscal years which is pretty comparable to the

increase in AR. It would seem that the inventory they are producing is being sold at relatively

the same rate as they are making it, which is an encouraging statistic. By examining this in

comparison to the balance sheet, one can see that raw materials increased at about 15 percent and

finished goods increased at about 20 percent. Stryker may have had a small surplus of raw

RESEARCH PAPER 20

materials or found a more efficient way to make their products. Either way, neither of these

assumptions is alarming.

The amount of AP decreased from $96 million in 2010 to $44 million in 2011. So it

appears they have paid down some of their debts by about $52 million, or about 54 percent. In

2009 this number was -$80 million, so AP had increased quite a bit from 2009 to 2010. It is

good to see that they are paying off some of this debt.

The cash from operating activities has been a steady, positive amount since 2009. This is

also a good sign. The net earnings has been fairly close to cash from operating activities for the

last three years, which shows that the quality of the cash is good.

Stryker’s Key Statistics

Even after reviewing all of the various ratios, there are still other statistics that should be

considered before investing in a company when doing a thorough analysis. The personal favorite

of the author is beta. A beta coefficient of 1.0 indicates that the stock is performing at the same

rate as the market. It has the same ups and downs as the market and they are at the same degree

of intensity as well. So in essence beta is a measure of volatility or risk. Currently (in

September 2012), Stryker has a beta of 0.88 ("Yahoo Finance Stryker Corporation," 2012).

Since it is less than one, this means that Stryker’s stock basically has the same ups and downs

that the market has, but to a lesser degree. So there is slightly less risk involved when investing

in Stryker stock when compared to the average stock in the market.

Stryker’s market value as of March 29, 2012 was almost $21 billion ("Fortune 500: 308

Stryker," 2012). The diluted EPS was $3.64 as of September 27, 2012 (“Yahoo Finance

Technical Analysis,” 2012). Some other key statistics can be seen in Figure 1 shown below.

RESEARCH PAPER 21

Figure 1

Key Statistics for Stryker

From Samz, D. “Stryker’s Problems Are Not So Bad,” 2012.

As one can see from the statistics, Stryker is performing better than the industry in most

categories. The P/E ratio, EPS growth, revenue growth, operating margin for the trailing 12

months, ROE for the trailing 12 months and the debt to equity ratio are all better than the

industry average. Based on these statistics, the author believes that Stryker is a good buy

currently when considering stocks within the industry. There are assuredly stocks outside the

industry that are better buys, but when looking at medical technology stocks, Stryker is doing

well compared to its competition.

RESEARCH PAPER 22

Forecast of Several Key Variables Figure 2

Stryker Corporation: Stock Price For Five

Years, Linear Regression Line

09/04/07

01/15/08

05/27/08

10/07/08

02/17/09

06/30/09

11/10/09

03/23/10

08/03/10

12/14/10

04/26/11

09/06/11

01/17/12

05/29/12

10/09/12

02/19/13

07/02/130.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

f(x) = − 0.004256282625168 x + 224.774134444381R² = 0.0561510356078442

Stryker Corporation: Stock Price For Five Years

Stryker Corporation: Stock Price For Five YearsLinear Regression Line

Data from "Stryker Corporation Historical Prices," 2012.

RESEARCH PAPER 23

Figure 3

Stryker Corporation: Stock Price For Five

Years, Moving Average

09/04/07

01/08/08

05/13/08

09/16/08

01/20/09

05/26/09

09/29/09

02/02/10

06/08/10

10/12/10

02/15/11

06/21/11

10/25/11

02/28/12

07/03/12

11/06/12

03/12/13

07/16/130

10

20

30

40

50

60

70

80

Moving average trend line with period = %PERIOD

Stryker Corporation: Stock Price For Five Years

Stryker Corporation: Stock Price For Five Years12 Per. Moving Average

Data from "Stryker Corporation Historical Prices," 2012.

According to regression line analysis of the last five years worth of data as shown in

Figure 2, Stryker’s stock price one year from now will be at about $48 per share. Realistically

this is a low estimate since it includes the large drop in price that affected almost all stocks in

2008. Looking at the moving average in Figure 3 to make a forecast, Stryker stock will be at

about $56 per share. This seems more likely and reasonable. “Yahoo Finance Technical

Analysis” (2012) puts the stock at $61.05 per share next year. The Financial Times puts the

forecast price between $54 and $78 with a median range of $60.50. Their 31 analysts all agree

RESEARCH PAPER 24

that Stryker will outperform the market (“Stryker Corp Forecasts,” 2012). The graph that they

used to make their forecast is shown below in Figure 4.

Figure 4

Stryker Forecast

From “Stryker Corp Forecasts,” 2012.

Depending on how the new CEO works out and any new changes in regulation that may

develop within the industry, the author believes that $60 to $61 is probably a good forecast for

the one year estimate of Stryker stock. If things go well and the new CEO continues to grow the

company and takes it in the right direction, the stock should be closer to $61 per share.

Other Information

As shown in the detailed analysis preceding this section, one can see that Stryker’s

statistics overall look pretty good and consistent for the past few years. Stryker has acquired

other companies over the past couple of years including its neurovascular segment and is

developing the spine segment. New regulations are calling for a 2.3% tax on medical devices

which will assuredly have an impact on Stryker’s bottom line, as well as that of its competitors.

There has been some bad press on one of the directors, Ronda Stryker, for selling off her shares

RESEARCH PAPER 25

over the last few years. But she has been a board member since 1984 and claims she is doing

this for philanthropic reasons. There have also been some product recalls which have hurt sales.

But Stryker continues to have a good presence in the overseas markets and overall continues to

do well as described above (Samz, 2012).

There was also some negative press regarding the previous CEO’s (MacMillan’s) exit,

but the company seems to have escaped too much negative effects from his departure. The

announcement on October 1, 2012 of the new President and CEO, Kevin Lobo, does not appear

to have negatively affected the stock price. To the contrary, the stock price actually rose and

closed high by October 4, 2012. This led The Street Wire to name it the featured health care

winner of the day. The price rose 64 cents or 1.2 percent to $55.06 on average volume (“Stryker

Corporation (SYK): Today's Featured,” 2012).

Stryker has a Morningstar credit rating of AA and is financed with 18.2 percent debt and

81.8 percent equity as of June 2012 (“Stryker Corporation Capital Structure,” 2012). This is a

great credit rating. In addition, the S&P changed its rating from A-1 to A-1+ in June of 2012.

They stated that the firm’s growth in revenue, very low debt, consistency, reputation with

physicians, and diversity of products which helps minimize the risk of recalls has helped Stryker

achieve this upgrade in its credit rating (Zipp, 2012). According to Ehrhardt and Brigham (2011,

p. 617), a firm’s optimal capital structure is related to its investment opportunities. Firms with

many profitable opportunities should use low levels of debt. This is exactly what Stryker is

doing with their capital structure mix. This allows Stryker to maintain its ability to invest and

maintain reserve borrowing capacity (Ehrhardt & Brigham, 2011, p. 617).

According to a recent 8-K SEC filing, Stryker recently refinanced its $1 billion revolving

line of credit through JPMorgan Chase Bank, N.A., due in August 2013 and it is now due in

RESEARCH PAPER 26

August 2017 (“Entry into a Material Definitive Agreement,” 2012). In addition, there was a SEC

filing in May 2012 regarding pending litigation. Stryker expects to settle with the Department of

Justice on the matter for an amount of $33 million. This lawsuit was regarding the marketing

and sales of its OtisKnee device which the DOJ alleges was not properly approved by the FDA.

According to the SEC filing, this charge impacted the diluted earnings per share by $0.09/share

in the second quarter earnings in 2012 (“Other Events, 2012).

In a personal interview with a podiatric surgeon that uses various products including

Stryker’s, the physician stated that he prefers Stryker’s screws and will only use them since they

have proven to be high-quality and very reliable over the years. Other companies have changed

to “cheaper” materials which this surgeon prefers not to use in his patients (W. Smith, personal

communication, September 20, 2012).

Finally, the author interviewed a current Stryker employee who wished to remain

anonymous. The employee works in the craniomaxillofacial sales division and has occupied his

position for the past five months. He stated there was a rigorous two-month interview process

before he was hired which included ride-along sales calls and a personality exam. The employee

likes working for the company since it is well-renowned in its industry, although he said it is

very competitive. He also stated that the company sends its employees to various training

programs which he enjoys. The employees do get stock options, but he was unable to disclose

the particular details on the options. In short, the employee said he loves working for the

company and would recommend it as a great place to work (Anonymous, 2012).

RESEARCH PAPER 27

Recommendation Regarding the Future of Stryker

As indicated in the above sections, the author believes this stock will be a good buy if one

is looking to invest in the medical technologies sector. Their statistics all vet out to be sound,

stable and consistent especially when compared to benchmark companies such as Zimmer and

others within the industry. Stryker has set themselves up with a good debt to equity ratios, an

AA credit rating from Morningstar and an A-1+ rating with S&P, and they are investing in areas

which should provide abundant growth. They don’t have an excessive amount of negative press

in the media. On the contrary, news of the new CEO has actually increased the company’s stock

price. The company is very well established and is still controlled by members of the family

who started it back in 1941. The author believes that family members tend to want to keep the

family reputation clean and will continue to run the company with the same mission and values

in mind going forward. Physicians prefer Stryker products since they have proven to be

dependable over the years. The large diversity of products helps reduce risk to the company,

especially from litigation and recalls. The author would invest both financial capital as a

shareholder in addition to human and intellectual capital as an employee in Stryker and believes

the company will be around for many years to come.

RESEARCH PAPER 28

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RESEARCH PAPER 29

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RESEARCH PAPER 30

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RESEARCH PAPER 31

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