stryker corporation (nyse: syk) healthcare...stryker corporation (syk) is a medical technology...

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Stryker Corporation (NYSE: SYK)

Krause Fund Research

Fall 2017

Healthcare Recommendation: HOLD

Company Overview

Stryker Corporation (SYK) is a medical technology compa-

ny whose core business operations are to develop, produce,

and distribute medical equipment to doctors, hospitals, and

other healthcare facilities. With operations predominately in

the United States, Stryker is largely using acquisitions to

expand business operations around the world. Their three

business segments, Orthopaedics, Medical and Surgical

Equipment (MedSurg), and Neurotechnology and Spine,

provide advanced medical equipment that will improve the

lives of patients. Stryker’s FY2016 performance was record

breaking as they surpassed $11 billion in total revenue.

Stock Performance Highlights 52 week High $160.62

52 week Low $106.48

Beta 0.87

Average Daily Volume 1,204,279

Share Highlights Market Capitalization $57,791 b

Shares Outstanding 376.6 m

Book Value per share $28.78

EPS - FY2017 $4.63

P/E Ratio 33.4

Dividend Yield 1.14%

Dividend Payout Ratio 36.72%

Company Performance Highlights ROA 8.10%

ROE 16.09%

Sales $11,325 b

Financial Ratios Current Ratio 3.22

Debt to Equity .99

Return on Equity 16.09

Key Investment Highlights

Investment Positives:

Favorable Economic Outlook – Healthcare will contribute

approximately 20% of total GDP by 20254. This is directly

correlated to aging demographics and the subsequent in-

creasing demand for healthcare equipment.

Increased Inorganic Growth – With successful acquisi-

tions of NOVADAQ and VEXIM in 2017, Stryker will con-

tinue to diversify their product mix internationally.

MAKO Robotic Arm – With the MAKO Robotic Arm

assisted surgery equipment still in its early stages, we be-

lieve it will continue to grow at increased levels and be

prevalent in total revenue for 2018.

Investment Negatives:

Healthcare Reform – With the GOP’s failed attempt to

repeal and replace the Patient Protection and Affordable

Care Act (PPACA), we see increased uncertainty in

healthcare insurance coverage. In addition, we believe the

PPACA’s 2.3% tax on medical devices will continue to hurt

healthcare equipment company earnings.

Product Recall – In Q2 of 2017, Stryker had a FDA regula-

tion violation resulting in the recall of products developed

by their subsidiary, Sage Products. Distribution has since

continued and Stryker will need ensure future products do

not violate FDA regulations.

One Year Stock Performance

Source: EDGAROnline

Analysts

John Walsh

[email protected]

Jack Burns

[email protected]

Isaac Schmitz

[email protected]

Current Price $154.48

Target Price $147-155

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We are recommending a HOLD rating for Stryker Corporation

(SYK). Our decision is based on historical performances, both

organic and inorganic growth projections, and increased uncer-

tainty surrounding government healthcare regulation. In addi-

tion, we believe Stryker’s forecasted year-over-year (YoY) reve-

nue growth in all three of their business segments will provide

increased opportunities to further diversify their product portfo-

lios via product research and development (R&D) and merger

and acquisition (M&A) activity.

Our forecasts and supporting valuation models reinforce our

recommendation of a HOLD rating. Although we have forecast-

ed a forward looking sales growth estimate of 9.23%, we find

investment risks including government regulation and the FDA.

We believe these, among other assumptions in our model, will

drive Stryker’s adjusted stock price to the range of $147-155.

U.S. Real Gross Domestic Product

Real Gross Domestic Product (GDP) is a macroeconomic as-

sessment that is used to measure the number of goods and ser-

vices produced by a nation. Real GDP is inflation-adjusted for

the price changes in the goods and services measured. The ex-

clusion of inflation gives a more accurate picture of the overall

growth in the economy. A high real GDP rate is usually an indi-

cation of a strong economy where unemployment is low, wages

are increasing, and corporate earnings are growing.

A real GDP growth rate in the 2.5-3.5% range is a widely ac-

cepted indicator of a healthy economy. The real GDP yearly

growth of the US economy has been below 3% since 2006 and

has failed to reach the 2.5% benchmark all but two years. In re-

cent quarters, and shown in Figure 1, real GDP has improved

from 2.5% in Q3 2016 to 3.0% in Q2 2017 and 3.1% in Q314.

Although the projected range is slightly lower than what would

be considered healthy, it is still a positive sign following growth

of 1.6% in Q1 2016.

Figure 14

The 2016 Presidential election brought a shift to economic strat-

egy. President Donald Trump proposed promises of increased

real GDP growth by means of corporate tax reform, healthcare

reform, and job growth. These promises have been a strong driv-

er for the U.S. stock market as the S&P 500 Index realized a

gain of 21% since the 2016 election. This sharp increase has led

to the highest consumer confidence in the last 27 years with an

index of 125.9 as of October 20175. Strong consumer confidence

leads to increased consumer spending and real GDP growth. The

Trump Administration is pushing forward on the corporate tax

reform bill they had promised throughout his campaign. They

plan to cut the corporate tax rate from 35% to 20% providing

companies with increased earnings and capital spending oppor-

tunities. In the long run, we believe increased corporate earnings

and capital spending will drive real GDP growth.

The US healthcare sector will be positively affected by real GDP

growth as it will lead to increased earnings and investment for

product development across the sector. Today, healthcare makes

up 17.8% of the real GDP and it is projected to grow at a rate of

5.6% annually until 202519. If projections are correct, the

healthcare sector will make up 19.9% of real GDP by 20254.

Additionally, government spending in the sector is projected to

grow at a rate of 5.9% due to the increasing elderly population21.

This will encourage growth and increased investment in the

healthcare sector.

Based on the current economic and political environment, as

well as the positive growth in the healthcare sector, we believe

that real GDP will be growing at the rate of 2.54% by 201821.

Other factors such as government regulation, Federal Reserve

policy, and an aging demographic, are key drivers of our real

GDP growth projection.

Federal Reserve Policy

The Federal Reserve Bank is the central bank of the United

States. They develop and administer the United States Federal

Reserve Policy. Although the Federal Reserve was founded by

congress, they are independent from the president, government

policy, and other government elected officials. The Federal Re-

serve is given a dual mandate to maximize employment and pro-

vide stable prices. They achieve their mandate by controlling

monetary policy, bank reserve requirements, open market opera-

tions, and the federal interest rate. Decisions on what monetary

policy actions to take are based on the current state of the econ-

omy, specifically when looking at the rates of unemployment

and inflation.

In attempts to achieve price stability in the economy, the Federal

Reserve works to control inflation. An inflation rate of 2% is

what the Federal Reserve considers to be acceptable. As shown

in Figure 2, inflation reached 2.1% in February of 2017, and it

was the first time it moved above the Federal Reserve’s target

rate of 2% since March of 201239. Since October 2017, inflation

has risen to a rate of 2.20%39. The current projections made by

the Congressional Budget Office (CBO) show an inflation rate

of 2% in 2018, which will remain the controlled rate for the next

10 years39. Inflation growth at a consistent rate will influence

Federal Reserve policy and improve consumer spending as peo-

ple will find greater value in the dollar.

Executive Summary

Economic Outlook

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Figure 2

The Federal Reserve’s dual mandate also includes maximizing

employment. Although full employment is desirable, healthy

economies have accepted a rate of unemployment to be in the

range of 4.5-6%37. In November 2017, the unemployment rate

fell to its lowest level of 4.1% since February 200138. Shown in

Figure 3, The CBO projects the unemployment rate to settle

around 4.4% in 2018 and rise to 4.7% for the following five

years38.

Figure 3

The healthcare sector has played a large role in the decrease of

the unemployment rate. Today, the sector makes up approxi-

mately 12.2% of all employment in the United States, and ac-

cording to the Bureau of Labor Statistics (BLS), this figure will

grow to 13.8% by 20261. Additionally, the aging demographic

leads to an increased need for employees in the healthcare sec-

tor9. We believe this yields positive growth for the sector.

If unemployment and inflation rates continue as projected, the

Federal Reserve will achieve their dual mandate by the end of

2018. Today, the federal interest rate is 1.25%8. In December

2017, a rate hike is expected making it Janet Yellen’s last mone-

tary policy action as the Federal Reserve Chairwoman before

being replaced by Jerome Powell. Powell has a similar view to

Yellen on the federal interest rate. Powell stated, “U.S. monetary

policy normalization has been and should continue to be gradual,

as long as the U.S. economy evolves roughly as expected”16.

Like Yellen and the CBO once stated, Powell expects the federal

interest rate to reach 3% by 2021, as shown in Figure 426. This

rate hike will cause the cost of borrowing to rise; thus decreasing

M&A activity. The healthcare sector has been prosperous under

low interest rates where M&A activity has increased. However,

we believe rising rates will also lead to lower rates of new

healthcare start-up companies. This could slow the growth of

healthcare sub-industry’s as large-cap corporations often rely on

acquisitions to drive growth.

Figure 4

Government Regulation

The healthcare sector is heavily regulated at both the federal and

state level. At the federal level, The U.S. Food and Drug Admin-

istration (FDA) regulates the sector by approving the manufac-

turing of all healthcare products prior to sale17.With approval,

manufacturers can market and sell products for a profit. The

FDA also has the power to identify products that are deemed

unsafe for consumers resulting in a product recall, or the imme-

diate suspension of the manufacturing and sale of a product. A

product that is recalled will negatively affect a company’s finan-

cial performance and their underlying reputation. Sale suspen-

sions, fines, and penalties are all punishments that companies

can receive if found in violation of FDA regulation.

Additional regulation at the federal and state level are found in

healthcare insurance. Programs like Medicaid and Medicare

provide insurance coverage for qualified individuals. Qualifica-

tions for Medicaid include low-income patients and nursing

home services2. Qualifications for Medicare include persons

aged 65 and older and those who are disabled19. During the

Obama Administration, the PPACA was implemented to provide

increased insurance coverage, affordability, and accessibility1.

When implemented, the standards for healthcare insurance were

changed and the number of uninsured citizens decreased from 44

million to 28 million1. For the healthcare sector, this posed great

opportunity for healthcare companies to increase the supply of

their products. It also introduced great pressure for the sector as

a 2.3% medical device tax was imposed on medical device man-

ufacturers24. Although the tax has predicted to raise $29 million

in revenue, the healthcare sector has realized adverse effects

financially1. Cost-cutting strategies such as reducing the number

of domestic employees and moving business operations overseas

were introduced to offset the financial losses caused by the med-

ical device tax.

The Trump Administration’s primary goal for repealing and re-

placing the PPACA was to increase the free market in healthcare

and to allow American citizens to choose individual coverage

plans. Attempts to repeal and replace the PPACA by the GOP

have recently failed. This has resulted in the party turning their

attention to tax reform. We believe that healthcare reform will be

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revisited later on in Trump’s presidential term. For healthcare,

the reform provides uncertainty on the success of the sector and

the ability for companies to manufacture and distribute

healthcare products.

Demographics

Demographics remain one of the most important factors for the

continued growth of the healthcare sector. The aging population

is more prone to chronic diseases, injury, and the need for medi-

cal care. As shown in current healthcare statistics, the average

life-span is increasing. Shown in Figure 5, and backed by Ana-

lyst predictions, total population over the age of 65 will increase

from 14.9% in 2015 to 22.1% by 205028. Those aged over 80,

will increase from 3.8% to 8.2% during the same time period28.

We believe that as the aging population starts to become a larger

component of the world’s total population, the demand for med-

ical care and services will increase. This will provide the

healthcare sector a larger demographic to market and distribute

medical products.

Figure 527

Overview

Stryker Corporation operates in the Healthcare Equipment Sub-

industry within the Healthcare Sector. Companies within this

industry manufacture medical devices, equipment, and supplies

for doctors, hospitals, and other healthcare facilities around the

world.

Industry Trends

For the past six years the healthcare equipment industry has un-

derperformed as a part of the healthcare sector. Measured by

stock performance, and shown in Figure 6, the S&P Composite

1500 Healthcare Equipment and Supplies Index increased nearly

103%28. However, this is compared to the 120% increase in the

S&P Composite 1500 Healthcare Sector Index28. Although re-

turns have been realized, they are predominately realized by

small- and mid-cap companies. Small- and mid-cap companies

drive the industry’s innovation by developing advanced medical

equipment and technologies. In addition, the high performance

from these small- and mid-cap companies have increased M&A

activity within the industry.

Figure 6

Today, and into the future, the global market for medical equip-

ment is projected to grow immensely. In 2016, the market was

estimated to be worth $338 billion. In 2017, it is projected to be

worth $355 billion. And in 2020, it is projected to be worth $411

billion28. Although this increased growth is desirable, challenges

remain including healthcare insurance programs and medical

device taxes. We believe those companies who focus on R&D

for product innovation and initiate inorganic growth opportuni-

ties will realize growth in total revenue and in market share.

We believe Stryker has the opportunity to position itself within

the medical equipment industry as a market leader. According to

the CFRA Healthcare Equipment and Supplies Industry Survey,

the three year compound annual growth rate (CAGR) for the

industry is projected at 7.3%28. We have projected a three year

average CAGR of 7.54% for Stryker in FY2017. This yields a

slight upside to Analyst forecasts because we believe Stryker

will realize industry leading returns from synergies realized from

recent acquisitions.

AHCA: Healthcare Plan

In March 2017, the GOP proposed the American Health Care

Act of 2017 (AHCA). The AHCA was designed to repeal and

replace the PPACA that was introduced in 2010.

The PPACA 2.3% medical device tax directly impacts the bot-

tom-line financials of medical equipment companies. When the

tax was introduced in 2013, it was forecasted to increase tax

revenue by $29 billion1. To mitigate the adverse effects of the

tax, companies have reduced domestic jobs and moved them

overseas and into low-cost labor environments. The tax mainly

affects small- and mid-cap firms who cannot afford the added

tax expenses leading to an industry littered with M&A.

On December 31st, 2017, the 2.3% medical device tax is set to

expire24. If the tax is not reinstated, we believe there will height-

ened optimism in the industry as companies will be better suited

for investment in the areas of employment and in R&D.

Forward looking, and according to comments made by the

Trump Administration, we believe the next opportunity for re-

pealing and replacing the PPACA could be in late 2018. We

believe the uncertainty surrounding healthcare regulation, and its

Industry Analysis

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associated medical device tax, pose increased risk for Stryker

and investors in the healthcare equipment industry.

Merger & Acquisition Activity

Companies in emerging markets have produced some of the

most compelling medical equipment innovations. With inade-

quate healthcare providers, equipment, and technology in low-

income areas around the world, existing healthcare providers are

forced to become innovative in introducing highly effective and

affordable medical technology. Today, small- and mid-cap com-

panies have been industry leaders in the development of ad-

vanced medical technologies in emerging and international mar-

kets. However, with capital restrictions, and in response to the

2.3% medical device tax, small- and mid-cap companies cannot

afford expenses associated with introducing a new product to the

market. To get their products available for sale, companies will-

ingly sell ownership, business operations, and products patents

to companies who have the capital to develop, manufacture, and

distribute new medical equipment to domestic and international

markets.

Over the last year there has been increased discussion on the

Federal Reserve’s policy on the federal interest rate. As we men-

tioned in our Economic Analysis, The Federal Reserve is ex-

pected to raise their interest rate after the New Year and when

Jerome Powell assumes his duty as the new Federal Reserve

Chairman. With this rate hike, we believe M&A activity will

slow as the cost of borrowing will become more expensive.

Since 1998, Stryker has completed 35 acquisitions of small- and

mid-cap medical equipment companies32. This data shows how

Stryker has been successful in realizing economies of scale

through inorganic growth initiatives. Looking forward, and due

to their industry leadership and capital expenditure capabilities,

we believe Stryker will continue their acquisitions in emerging

and international markets. Please see our Recent Development

section to review notable acquisitions for Stryker in 2017.

Research and Development

New innovative products are the lifeline for the medical equip-

ment industry. This makes R&D expenditures imperative for

positive revenue growth. R&D costs are usually the largest in-

vestments medical equipment companies make. R&D expenses

are large, upfront sunk costs; however, after the production of a

FDA approved product, its revenues flow smoothly to the bot-

tom-line. R&D expenses are primarily associated with clinical

research studies, production fees, FDA licensing, and costs asso-

ciated with labor42. R&D expenses, on average, consume 12% of

total revenue for a company28.

As we near the end of 2017 and the suspension of the 2.3% med-

ical device tax, medical equipment companies are optimistic that

they will soon have increased capital available for R&D. We

believe Stryker will continue to acquire small- and mid-cap

companies to diversify their product mix and expand operations

internationally.

Markets and Competition

The Healthcare sector provides lucrative investment opportuni-

ties. As the elderly population continues to increase, we believe

health issues associated with age will also increase. This in-

crease in demand for medical equipment will lead to the growth

of the healthcare sector and it’s sub-industry as shown in our real

GDP projections. Additionally, we have identified a subset of

investors that believe the healthcare sector is too risky due to the

uncertainty surrounding the regulatory environment. We believe

the current economic and industry environment will outweigh

the political risks, yielding positive returns for medical equip-

ment investors.

Porter’s Five Forces

Threat of New Entrants: Moderate

Large-cap medical equipment firms have a moderate threat from

small- and mid-cap firms wanting to enter the industry. Barriers

to entry can be perceived as high due to the R&D investment

needed for materials, professional labor, and capital for FDA

approval. Although there is a small threat of these firms actually

developing a FDA approved product, large firms still employ

defensive measures such as acquiring the new entrant. Addition-

ally, small- and mid-cap firms may seek an acquisition by a

large-cap firm to ensure their product will become FDA ap-

proved, manufactured, and distributed.

Competitive Rivalry: High

The medical equipment industry has increasingly become more

competitive as firms have started a “technology race,” or created

an environment about who can develop and market the most

advanced medical equipment. With pressure from the future of

healthcare insurance coverage and FDA approval rates, competi-

tion arises from who can mitigate the negative effects these pres-

sures pose. For firms to stay competitive, they must actively

seek to acquire threatening firms with unique products.

Bargaining Power of Suppliers: Low

Companies in the industry work to diversify their raw materials

supply chain to reduce shortage risks. Large firms build leverage

on suppliers as they are usually their largest revenue source. Ad-

ditionally, raw materials must be approved by regulatory agen-

cies before a contract is signed. Due to the risks of supplier de-

fault or implications from natural disasters, medical equipment

companies often obtain multiple supplier contracts to ensure

sufficient raw material supply.

Threat of Substitutes: High

Medical equipment firms run the risk of having substitute prod-

ucts enter the market. Substitutes arise when existing product

prices are too high and when competitors update existing tech-

nology. To mitigate this high risk, increased investment in prod-

uct development and M&A must be deployed to lead the way in

product innovation and portfolio diversification. Firms must also

strategize product development timelines based on current patent

expiration dates.

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Company Name 2016 Revenue

Becton, Dickinson 12,483$

Stryker Corporation 11,325$

Baxter 10,163$

Boston Scientific 8,386$

Zimmer Biomet 7,684$

Hill-Rom 2,665$

Bargaining Power of Buyers: High

Medical equipment firms are in a never-ending price competi-

tion with other firms and buyers who both demand cost-effective

products. Additionally, healthcare insurance plays a large role

for buyers in this industry. Adequate coverage increases product

demand, whereas inadequate coverage reduces the number of

patients capable of attaining healthcare treatment. Medical

equipment product prices are high due to high R&D expenses

associated with its development. Stryker must strive to provide

the most competitive prices in the industry.

Peer Analysis

Stryker Corporation is one of the largest medical technology

companies in the healthcare equipment industry.

We determined Stryker’s peers based on business operations and

product portfolios. Peers include Boston Scientific Corp., Baxter

International, Inc., Becton, Dickinson and Company, Corp., Hill-

Rom, and Zimmer Biomet Holdings, Inc10. In Figure 6 we have

illustrated how Stryker’s total revenue compares to its peers dur-

ing FY2016.

Stryker and its subsidiaries develop products for their three busi-

ness segments: Orthopaedics, MedSurg, and Neurotechnology

and Spine. The company distributes their products to doctors,

hospitals, and healthcare facilities in hopes of achieving their

corporate goal of improving the lives of patients around the

world.

Stryker operates mainly in the United States and we believe they

will further expand their international operations in the foreseea-

ble future. In Figure 7, we have broken down Stryker’s total rev-

enue by region for FY2016.

Figure 7

Recent Developments

NOVADAQ Acquisition:

In September 2017, Stryker completed the acquisition of NO-

VADAQ Technologies. NOVADAQ is a Canadian medical im-

aging company that develops, manufacturers, and distributes

fluorescence imaging products that provide healthcare providers

with real-time visualization of blood flow vessels and related

tissue for microsurgical, plastic, reconstructive, and other mini-

mal invasive procedures23. Rationale behind this deal was to

complement Stryker’s Endoscopy portfolio in their MerSurg

business segment. At a premium of 95.8%, the transaction was

completed with a purchase price of $701 million, or $11.75 per

share in cash33. Analyst forecasts predict dilution of $0.03-0.05

in FY2017 Earnings per Share (EPS) 29. In 2018, we believe the

acquisition will turn accretive as synergies become realized.

VEXIM Acquisition Announcement:

In October 2017, Stryker announced the acquisition of VEXIM.

VEXIM is a French medical device company specializing in

vertebral fracture solutions44. Rationale behind this acquisition

was to complement Stryker’s Neurotechnology and Spine busi-

ness segment. The transaction will include a majority stake in

securities held by VEXIM shareholders. Stryker will pay ap-

proximately €20.00 per share and will receive 50.7% of share

capital and 50.3% of VEXIM voting rights42. We believe this

acquisition will boost Stryker’s Nuerotechnology and Spine

segment sales and increase their international presence. Analyst

estimate that the transaction will be completed in Q4 of FY2017

and that the total effect on net EPS will be neutral25.

Company Analysis

Figure 6

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Business Segment Revenue

Orthopaedics 4,422$

MedSurg 4,894$

Neurotechnology and Spine 2,009$

Total Revenue 11,325$

Portfolio Revenue

Knees 1,490$

Hips 1,283$

Trauma and Extremities 1,364$

Other 285$

Total 4,422$

MAKO Robotic-Arm Assisted Surgery:

Stryker’s 2017 Q3 success can be attributed to the MAKO Ro-

botic-Arm Assisted Surgery. The MAKO Robotic-Arm performs

minimally invasive joint replacement surgeries that lead to pre-

dictable procedures for surgeons and more favorable outcomes

for patients36. With over 380 robots installed in the U.S., 50% of

them have been updated with the Total Knee Replacement appli-

cation29. We believe MAKO’s success will be driven by Total

Knee Replacement procedures as Stryker received 510 (k) clear-

ance from the FDA for the Triathlon Triatanium11. The Triathlon

Triatanium provides surgeons with predictable surgical experi-

ences and an alternative to bone cement37. More than 20% of all

MAKO Total Knee procedures are being performed with the

Triathlon Triatanium and we believe this figure will grow in

2018. Additionally, we believe with aging demographics, the

MAKO Robotic-Arm and the Total Knee Replacement proce-

dure will be Stryker’s leading revenue generator in 2018 and

beyond29.

Q3 Earnings Report:

Stryker released their third-quarter earnings report on October

27, 2017. For the quarter, Stryker realized impressive results as

quarterly revenue of $3.01 billion outperformed Analyst projec-

tions of $2.97 billion34. Stryker exhibited strong growth despite

setbacks caused by recent hurricanes and the FDA recall on se-

lect Sage Products.

Stryker has a manufacturing facility in Puerto Rico that produces

equipment for the Endoscopy and Instruments portfolios in their

MedSurg business segment. This facility sustained minimal

damage from the Hurricanes despite sporadic losses of power

that halted product manufacturing. Additionally, Stryker realized

losses due to cancelled procedures in areas affected by the Hur-

ricanes, such coastal communities in Texas and southwest Flori-

da.

Stryker also received penalties for violating FDA regulations

during Q3. Their penalty included the recall of cloth based prod-

ucts developed by their subsidiary, Sage Products. With the re-

call, Stryker was asked to update product testing methodologies

and sterilization techniques. Stryker resumed Sage Products dis-

tribution in late September29.

Corporate Strategy

Stryker separates their business operations into three segments:

Orthopaedics, MedSurg, and Neurotechnology and Spine.

Stryker has manufacturing plants all over the world. However,

the manufacturing of certain product lines is usually concentrat-

ed to just one or two plants to increase operating efficiency. In

addition, several raw materials, components, and finished devic-

es are procured from specialty suppliers due to quality and intel-

lectual property considerations associated with FDA regulation.

Once a product is developed and manufactured, Stryker and its

subsidiaries distribute it directly to doctors, hospitals, and other

healthcare facilities.

Stryker realized net revenue of $11,325 million in FY2016. In

their respective segments, MedSurg had total revenue of $4,894

million, Orthopaedics had total revenue of $4,422 million, and

Neurotechnology and Spine had total revenue of $2,009 mil-

lion30. Figure 8 shows Stryker’s total revenue by segment for

FY2016.

Business Segments

Orthopaedics

The Orthopaedic segment consists of implants used in the re-

placement of knees and hips as well as products used in trauma

and extremity surgeries. Stryker is a leader in specialized prod-

ucts that enhance the lives of patients by making recoveries sim-

pler, faster, and more effective30. The segment is composed of

four portfolios: Knees, Hips, Trauma and Extremities, and Oth-

er. Orthopaedics was Stryker’s second biggest segment in

FY2016. Figure 9 shows Stryker’s Orthopaedics total revenue by

product portfolio.

Figure 8

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Portfolio Revenue

Instruments 1,553$

Endoscopy 1,470$

Medical 1,633$

Sustainability 238$

Total 4,894$

Figure 9

Medical and Surgical Equipment – MedSurg

The Medical and Surgical Equipment segment (MedSurg) con-

sists of products used by care-givers, doctors, hospitals, and

healthcare facilities. They are a market leader in developing

products that improve the treatment of patients in medical clinics

and hospitals, and the products used in Emergency Medical Ser-

vices (EMS)30. The segment is composed of the portfolios: In-

struments, Endoscopy, Medical, and Sustainability. MedSurg

was Stryker’s largest contributor of revenue for FY2016. Figure

10 shows MedSurg’s total revenue by portfolio for FY2016.

Neurotechnology and Spine

The Neurotechnology and Spine segment consists of products

for spine, cranial, and neurovascular applications. The segment

is composed of two portfolios: Neurotechnology and Spine. This

is the smallest business segment for Stryker. Figure 11 shows

Neurotechnology and Spine’s total revenue by portfolio for

FY2016.

Portfolio Revenue

Neurotechnology $1,255

Spine $754

Total $2,009

Figure 11

SWOT Analysis

Strength

Product Development

Stryker puts emphasis on product development to ensure they

keep pace with, and stay ahead of, the dynamic healthcare

equipment industry. Stryker collaborates with physicians and

medical personnel to ensure their products are meeting patient

demands. Stryker has also decentralized manufacturing opera-

tions by separating the development of new products from the

improvement of existing products. We believe this will enhance

manufacturing efficiency33.

Emerging Markets

Stryker has the capital to invest in small- and mid-cap compa-

nies to further diversify their product mix. Their investment in

high growth potential companies also provide Stryker the oppor-

tunity to expand international operations 33.

Figure 10

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Business Segment 2017E 2018E 2019E

Orthopaedics 5.88% 5.20% 4.89%

MedSurg 13.02% 9.10% 6.33%

Neurotechnology and Spine 7.37% 7.64% 7.65%

Total Revenue Growth 9.23% 7.37% 6.03%

Orthopedic Device Market

Stryker has more than 1,000 FDA approved orthopedic devic-

es36. These patents provide Stryker leading market share and

increased opportunities for organic growth. The Orthopaedic

segment accounted for 44% of total revenue in FY201633. We

believe this segment, with help from the MAKO Robot, will

continue to be a leading revenue driver for years to come.

Weakness

Product Safety

Stryker must be cautious about equipment deficiencies as they

pose significant threats to the safety of patients. When product

deficiencies are identified, the resulting product recall can cause

adverse impacts to product sales and the reputation of the com-

pany33. Stryker must ensure they do not have any negative im-

plications regarding FDA regulation and product recalls.

Patent Infringement and Renewal

Stryker must be aware of any patent infringement issues that can

lead to litigation, lawsuits, and regulatory action. Also, Stryker

must ensure that when product patents expire, there is a new and

improved product readily available for sale. Failure to do either

of those things will result in decreased profitability due to the

expense of lawsuits and product applications 33.

Opportunity

Global Growth

By increasing M&A activity, Stryker can grow their internation-

al presence. With international acquisitions, Stryker will be able

to further diversify their product portfolios. Stryker has been

successful when acquiring international companies with special-

ized products such as NOVADAQ in Canada and VEXIM in

France33.

Orthopaedics and the MAKO Robotic Arm

With the newly commercialized Triathlon Triatanium Total

Knee Replacement, we believe Stryker can position themselves

as a market leader in Orthopedic devices. We also believe this

product, accompanied by the MAKO Robotic Arm, will be

Stryker’s greatest source of revenue in the near term. Additional-

ly, with the impact of changing demographics, it is predicted that

the global market for Orthopedic devices will reach $60 billion

by FY202128.

Threat

Cost Pressure

Stryker faces scrutiny over the prices of their products. If

Stryker’s product prices are too high, product demand and its

associated revenue will dwindle resulting in the loss of market

share to peers with lower prices33.

Competition

Stryker must continually update and introduce new products in

each of their business segments. Market share can be lost when

they fail to meet the demand for new and advanced products33.

Valuation Summary

After our analysis of the economy, the healthcare industry, and

Stryker Corporation, we are issuing a HOLD rating. Using mul-

tiple valuation techniques, we arrived at a stock price range of

$147-155. While we did use multiple techniques to determine a

targeted intrinsic value of Stryker’s stock, such as the Discount-

ed Cash Flow Model (DCF), Economic Profit Model (EP), Divi-

dend Discount Model (DDM), and Relative Valuation, we be-

lieve that our DCF and EP models provide the best representa-

tion of our opinions for Stryker moving forward.

Revenue Forecasts

Our forecasts and valuation models were based off of our inter-

pretation of Stryker’s historical performances. In the following

section, we will show their forecasted revenue by segment.

We have estimated sales growth in all three business segments in

Figure 12. The decrease in sales growth is due to Stryker’s ina-

bility to introduce revolutionary products in each segment every

year. Total revenue growth in 2017E, 2018E, and 2019E are

forecasted to be 9.23%, 7.37%, and 6.03% respectively.

Figure 12

Orthopaedics

The Orthopaedic segment shows increased growth due to the

fully commercialized Triathlon Triatanium Total Knee Re-

placement device. As this device increases in popularity among

surgeons around the world, we believe Stryker can be a leader in

the Orthopaedic device industry.

Orthopaedics 2016 2017E 2018E 2019E

Knees 6.20% 5.70% 5.10% 4.80%

Hips 1.58% 1.40% 2.60% 3.00%

Trauma and Extremeties 5.65% 6.90% 6.90% 6.40%

Other 7.14% 22.10% 8.20% 5.80%

Total Orthopaedic Growth 4.71% 5.88% 5.20% 4.89% Figure 13

Medical and Surgical Equipment – MedSurg

Our forecasted revenue for the MedSurg segment shows a radi-

cal change in growth for the Medical portfolio. This spike is

directly correlated to the fully commercialized MAKO Robotic

Arm and its increased popularity among surgeons. In addition,

we see growth in their Endoscopy portfolio related to the newly

acquired NOVADAQ Technologies. Due to the necessity of

medical and surgical equipment in all healthcare facilities, we

have forecasted positive growth.

10 | P a g e

MedSurg 2016 2017E 2018E 2019E

Instruments 5.93% 6.30% 6.40% 5.60%

Endoscopy 5.76% 15.00% 12.30% 6.30%

Medical 98.42% 18.50% 9.00% 7.00%

Sustainability 10.19% 7.10% 6.10% 6.00%

Total MedSurg Growth 25.65% 13.02% 9.10% 6.33%

Neurotechnology and Spine 2016 2017E 2018E 2019E

Neurotechnology 15.35% 11.20% 10.50% 10.00%

Spine 1.89% 1.00% 2.40% 3.00%

Total Neurotechnology and Spine Growth 9.90% 7.37% 7.64% 7.65%

Figure 14

Neurotechnology and Spine

In 2016, Stryker was the first company to receive expanded in-

diction from the FDA for their Trevo Retriever. Trevo is a

treatment that reduces paralysis, speech difficulties, and other

disabilities for stroke patients36. With positive recognition from

the FDA, and their recent majority stake in VEXIM, we believe

the Neurotechnology and Spine segment will maintain segmental

growth of 7-8% for 2017E, 2018E, and 2019E.

Figure 15

Revenue Growth Summary

We believe Stryker’s revenue growth is backed by their in-

creased acquisition activity and the results of revenue realized

from new products. As shown in Figure 15, revenue growth will

continue at an upward trend. Additionally, international sales

will continue to grow due to Stryker’s inorganic growth initia-

tives.

Figure 16

Margin Analysis

Research and Development

We believe Stryker will keep R&D costs proportionate to the

growth of the company. We used historical R&D expenses as

guidance for our forecasts. For 2017E, 2018E, and 2019E, we

project R&D expenses to be $781, $839, and $889 million, or

approximately 6.31% of total sales. These expenses will directly

support Stryker’s investment in clinical research, licensing and

fees, and personnel costs for the development of new products.

Selling, General and Administrative (SG&A)

We believe Stryker will keep SG&A expenses proportionate to

the growth of the company. We used historical SG&A expenses

as guidance for our forecasts. On average, 36.6% of Total Sales

contribute to SG&A expenses, or the expenses associated with

product shipment, fixed overhead costs, and salaries for compa-

ny administrators. For 2017E, 2018E, and 2019E, we projected

SG&A expenses to be $4,527, $4,860, and $5,153 million.

Weighted Average Cost of Capital (WACC)

We calculated a 6.8% weighted average cost of capital for

Stryker Corporation. Stryker’s pre-tax cost of debt was 4.01%,

and their cost of equity was 6.83%. Stryker does not distribute

Preferred Stock. We assume Stryker will maintain a consistent

capital structure and therefore have applied a 6.8% WACC

across the entire time horizon.

Cost of Equity

We derived Stryker’s 6.83% cost of equity using the Capital

Asset Pricing Model (CAPM). Stryker holds $57.8 billion in

total equity that makes up 99.18% of Stryker’s total capital

structure. We derived total equity value using the product of the

market value share price of $154.48 and total share’s outstand-

ing of 374.1 million30. We assumed a risk-free rate of 2.79, or

the yield for the 30-year Treasury Bill4. We assumed a 4.63%

market premium, or Aswath Damodaran’s trailing 12 month

adjusted market premium7. Lastly, we used Stryker’s 5-year av-

erage raw beta of .87 that was outsourced from Bloomberg3.

Cost of Debt

Stryker’s total short-term and long-term debt is equal to $228

million. With the addition of their $248 million present value of

operating leases, Stryker’s total market value of debt is equal to

$476 million. We identified Stryker’s pre-tax cost of debt to be

4.01% based on corporate bond yield-to-maturity averages3.

Debt makes up 0.82% of Stryker’s total capital structure.

Marginal Tax Rate

We assumed a marginal tax rate of 14.26% for Stryker. We de-

termined this figure by taking the marginal tax rate used in

FY201630. Because we believe Stryker’s capital structure will

remain constant, we have assumed that their marginal tax rate

will remain constant, too. Stryker’s effective tax rate is also

14.26%.

11 | P a g e

Discounted Cash Flow and Economic Profit Model

We believe our DCF and EP models best reflect our opinions on

Stryker’s adjusted stock price of $152.07. Our adjusted price

shows a downside of -1.56% to the closing market price of

$154.48 on November 10, 201738.

Our NOPLAT figure has large YoY growth in 2018E and 2019E

of 11.6% and 11.14% .This increased growth is directly correlat-

ed to Stryker’s realization of increased sales from their MAKO

Robotic Arm and other newly acquired companies. In our mod-

els, we calculated a continuing value of $72,603 million. This

figure was derived from our CV Growth Rate of NOPLAT of

2.20% and our CV Growth Rate of ROIC of 34.32%. Our

growth rate assumption reflects the current inflation rate of

2.20%26.

Dividend Discount Model (DDM)

According to our DDM, Stryker’s adjusted stock price should be

$124.35. Our stock price shows a 19.50% downside to the mar-

ket value price of $154.48 on November 10, 2017. We used

management guidance to calculate the average dividend payout

ratio of 41%. We also assumed a CV Growth of EPS of 4.42%,

or the average growth in EPS from 2018E to 2022E. In conclu-

sion, we determined that Stryker pays a dividend well below

what they can afford which leads to the low intrinsic stock price

in our model. We will not include the DDM for our target price

assumption.

Relative Valuation

Relative valuation is a good method for comparing company

stock prices relative to total earnings. It distinguishes companies

who are under/overvalued. We believe the P/E relative valuation

analysis best reflect Stryker’s dominance in the medical equip-

ment industry as their current ratio is 33.4x. Stryker’s competitor

average FY17 P/E is 21.1x. Stryker’s P/E ratio shows that they

are valued at a 58% premium when compared to their closest

peers.

We find that relative valuation does not reflect Stryker’s future

expectations and performances, rather it reflects their perfor-

mance in comparison to their peers. We believe Stryker should

be valued at a premium because of their forecasted growth and

their large market share in the medical equipment industry.

Sensitivity Analysis

We believe the Healthcare Industry and Medical Equipment

Sub-industry will experience drastic changes in government

regulation. We used a series of sensitivity tables to analyze

changes in our assumptions to determine how they may im-

pact our model.

Beta vs Risk-Free Rate

When considering the changing economic environment and

the perceived risk when investing, we sensitized the changes

in Beta and the Risk-Free Rate. With increases in both the

Beta and the Risk-Free Rate, the increased risk yields a low-

er stock price. With changes in both the Beta and the Risk-

Free Rate, we identified swift changes in the stock price

leading to our assumption that these variables are most sen-

sitive to the changes in the market and economic environ-

ment.

CV Growth of NOPLAT vs WACC

We tested the CV Growth Rate of NOPLAT and the WACC

to determine how sensitive the stock price is to incremental

changes in our forecasting methods. We saw stock price

sensitivity to be most impacted by increases or decreases in

the WACC. WACC impacts all assumptions made in our

model; therefore it will have the largest impact on stock

price changes.

CV Growth of ROIC vs WACC

We tested the CV Growth of ROIC and the WACC to de-

termine how sensitive the stock price is to incremental

changes in our forecasting methods. We saw stock price

sensitivity to be most impacted by increases or decreases of

the WACC. WACC impacts all assumptions made in our

model; therefore it will have the largest impact on stock

price changes.

CV Growth of NOPLAT vs CV Growth of ROIC

We tested the sensitivity of the CV Growth Rate of NO-

PLAT and the CV Growth Rate of ROIC to determine how

stock price would change with differences in our valuation

drivers. Although increased growth rates in both figures will

yield a higher stock price, we found that changes in the CV

Growth of NOPLAT had the largest impact.

12 | P a g e

Important Disclaimer

This report was created by students enrolled in the Applied Eq-

uity Valuation (FIN:4250) class at the University of Iowa. The

report was originally created to offer an internal investment rec-

ommendation for the University of Iowa Krause Fund and its

advisory board. The report also provides potential employers and

other interested parties an example of the students’ skills,

knowledge and abilities. Members of the Krause Fund are not

registered investment advisors, brokers or officially licensed

financial professionals. The investment advice contained in this

report does not represent an offer or solicitation to buy or sell

any of the securities mentioned. Unless otherwise noted, facts

and figures included in this report are from publicly available

sources. This report is not a complete compilation of data, and

its accuracy is not guaranteed. From time to time, the University

of Iowa, its faculty, staff, students, or the Krause Fund may hold

a financial interest in the companies mentioned in this report.

13 | P a g e

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15 | P a g e

Stryker CorporationKey Assumptions of Valuation Model

Ticker Symbol SYKCurrent Share Price 154.48$ Current Model Date 11/10/2017FY End (month/day) Dec. 31

Pre-Tax Cost of Debt 4.01%Beta 0.87Risk-Free Rate 2.79%Equity Risk Premium 4.63%CV Growth of NOPLAT 2.20%CV Growth of ROIC 34.32%CV ROE 12.66%CV Growth of EPS 4.42%Current Dividend Yield 1.14%Marginal Tax Rate 14.26%Effective Tax Rate 14.26%WACC 6.80%Rate of Inflation 2.20%DCF Price 149.26$ EP Price 149.26$

Adjusted Stock Price (November 10, 2017) 152.07$

Stryker CorporationRevenue Decomposition

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CVSegment SalesOrthopaedics:

Knees 1,396 1,403 1,490 1,575 1,655 1,735 1,813 1,887 1,964 Y/Y Growth 1.82% 0.50% 6.20% 5.70% 5.10% 4.80% 4.50% 4.10% 4.10%Hips 1,291 1,263 1,283 1,301 1,335 1,375 1,419 1,464 1,511 Y/Y Growth 1.49% -2.17% 1.58% 1.40% 2.60% 3.00% 3.20% 3.20% 3.20%Trauma and Extremities 1,230 1,291 1,364 1,458 1,559 1,658 1,755 1,844 1,938 Y/Y Growth 10.22% 4.96% 5.65% 6.90% 6.90% 6.40% 5.80% 5.10% 5.10%Other 236 266 285 348 377 398 421 446 472 Y/Y Growth 24.21% 12.71% 7.14% 22.10% 8.20% 5.80% 5.80% 5.80% 5.80%

Total Orthopaedics 4,153 4,223 4,422 4,682 4,925 5,166 5,408 5,641 5,886 Y/Y Growth 5.17% 1.69% 4.71% 5.88% 5.20% 4.89% 4.67% 4.32% 4.33%

MedSurg:Instruments 1,424 1,466 1,553 1,651 1,756 1,855 1,951 2,045 2,143 Y/Y Growth 12.21% 2.95% 5.93% 6.30% 6.40% 5.60% 5.20% 4.80% 4.80%Endoscopy 1,382 1,390 1,470 1,691 1,898 2,018 2,141 2,255 2,374 Y/Y Growth 13.09% 0.58% 5.76% 15.00% 12.30% 6.30% 6.10% 5.30% 5.30%Medical 766 823 1,633 1,935 2,109 2,257 2,383 2,512 2,648 Y/Y Growth 7.89% 7.44% 98.42% 18.50% 9.00% 7.00% 5.60% 5.40% 5.40%Sustainability 209 216 238 255 270 287 304 322 341 Y/Y Growth -1.88% 3.35% 10.19% 7.10% 6.10% 6.00% 6.00% 6.00% 6.00%

Total MedSurg 3,781 3,895 4,894 5,531 6,035 6,416 6,780 7,134 7,506 Y/Y Growth 10.75% 3.02% 25.65% 13.02% 9.10% 6.33% 5.66% 5.22% 5.22%

Neurotechnology and Spine:Neurotechnology 1,001 1,088 1,255 1,396 1,542 1,696 1,866 2,043 2,237 Y/Y Growth 9.40% 8.69% 15.35% 11.20% 10.50% 10.00% 10.00% 9.50% 9.50%Spine 740 740 754 762 780 803 827 852 878 Y/Y Growth -0.40% 0.00% 1.89% 1.00% 2.40% 3.00% 3.00% 3.00% 3.00%

Total Neurotechnology and Spine 1,741 1,828 2,009 2,157 2,322 2,500 2,693 2,895 3,115 Y/Y Growth 5.01% 5.00% 9.90% 7.37% 7.64% 7.65% 7.75% 7.50% 7.59%

Total Net Sales 9,675 9,946 11,325 12,370 13,282 14,082 14,881 15,670 16,507 Y/Y Growth 7.25% 2.80% 13.86% 9.23% 7.37% 6.03% 5.67% 5.31% 5.34%

Geographic SalesUnited States 6,558 7,116 8,247 9,072 9,797 10,434 11,060 11,696 12,363 Y/Y Growth 9.59% 8.51% 15.89% 10.00% 8.00% 6.50% 6.00% 5.75% 5.70%International 3,117 2,830 3,078 3,298 3,484 3,648 3,820 3,974 4,144 Y/Y Growth 2.63% -9.21% 8.76% 7.15% 5.65% 4.70% 4.72% 4.01% 4.28%

TOTAL Geographic Sales 9,675 9,946 11,325 12,370 13,282 14,082 14,881 15,670 16,507 Y/Y Growth 7.25% 2.80% 13.86% 9.23% 7.37% 6.03% 5.67% 5.31% 5.34%

Stryker CorporationIncome Statementin millionsFiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CVSales:

Orthopaedics 4,153 4,223 4,422 4,682 4,925 5,166 5,408 5,641 5,886 MedSurg 3,781 3,895 4,894 5,531 6,035 6,416 6,780 7,134 7,506 Neurotechnology and Spine 1,741 1,828 2,009 2,157 2,322 2,500 2,693 2,895 3,115

Total Sales 9,675 9,946 11,325 12,370 13,282 14,082 14,881 15,670 16,507

Cost of Sales:

Cost of sales 3,129 3,157 3,603 3,954 4,246 4,502 4,757 5,009 5,277 Depreciation 190 187 227 253 293 330 368 408 454

Gross Profit 6,356 6,602 7,495 8,163 8,743 9,251 9,756 10,254 10,777

Operating Expenses:

Research, development & engineering expenses 614 625 715 781 839 889 940 990 1,042 Selling, general & administrative expenses 3,575 3,610 4,137 4,527 4,860 5,153 5,445 5,734 6,040 Recall charges, net of insurance recoveries 761 296 158 270 290 308 325 342 361 Amortization of intangible assets 188 210 319 283 304 323 341 359 378

Total Operating Expenses 5,138 4,741 5,329 5,861 6,293 6,673 7,051 7,425 7,821

Operating Income 1,246 1,861 2,166 2,302 2,450 2,579 2,705 2,828 2,955

Other income (expense), net (86) (126) (245) (268) (275) (296) (313) (331) (348)Earnings (loss) before income taxes 1,160 1,735 1,921 2,034 2,175 2,283 2,392 2,498 2,607

Income taxes 645 296 274 290 310 326 341 356 372 Net Earnings (Loss) 515 1,439 1,647 1,744 1,864 1,957 2,051 2,141 2,235

Net earnings per share of common stock:

Basic net earnings per share of common stock 1.36 3.82 4.40 4.63 4.92 5.13 5.34 5.54 5.75 Dividends per share of common stock 1.22 1.38 1.52 1.70 1.92 2.10 2.30 2.38 2.59

Weighted-average shares outstanding:Basic 378.5 376.6 374.1 376.6 379.2 381.7 384.2 386.7 389.0

Stryker CorporationBalance Sheetin millionsFiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CVASSETSCurrent Assets:

Cash & cash equivalents 1,795 3,379 3,316 3,947 5,684 7,439 8,956 10,568 12,137 Marketable securities 3,205 700 68 70 72 74 76 78 80 Accounts receivable, net 1,572 1,662 1,967 2,075 2,228 2,362 2,496 2,629 2,769 Inventory 1,588 1,639 2,030 2,095 2,250 2,385 2,521 2,654 2,796 Prepaid expenses & other current assets 524 564 480 632 678 719 760 800 843 Deferred tax asset, net 552 442 247 173 98 - - - -

Total Current Assets 9,236 8,386 8,108 8,993 11,010 12,980 14,809 16,730 18,626

Property, plant and equipment:

Total property, plant & equipment 2,597 2,730 3,161 3,661 4,121 4,596 5,096 5,671 6,246 Less accumulated depreciation 1,499 1,531 1,592 1,845 2,138 2,467 2,835 3,243 3,696

Net property, plant and equipment 1,098 1,199 1,569 1,816 1,983 2,129 2,261 2,428 2,550 Goodwill 4,186 4,136 6,356 6,356 6,356 6,356 6,356 6,356 6,356 Other intangibles, net 2,018 1,794 3,508 3,500 3,300 3,100 3,100 3,000 3,000 Other noncurrent assets 699 697 839 857 876 896 915 935 956 Total Assets 17,237 16,212 20,380 21,522 23,526 25,460 27,441 29,449 31,487

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Accounts payable 329 410 437 469 504 534 565 595 626 Accrued compensation 597 637 767 798 856 908 959 1,010 1,064 Income taxes 333 141 40 110 104 93 114 113 116 Dividend payable 131 142 159 173 187 198 209 220 232 Accrued expenses & other liabilities 2,344 1,404 1,517 1,041 1,118 1,185 1,252 1,319 1,389 Current maturities of debt 727 769 228 205 185 166 150 135 121

Total Current Liabilities 4,462 3,503 3,148 2,796 2,953 3,084 3,248 3,392 3,549

Long-term debt, excluding current maturities 3,246 3,253 6,686 6,870 7,372 7,813 8,253 8,688 9,149 Other noncurrent liabilities 935 945 996 1,018 1,040 1,063 1,087 1,110 1,135 Total Liabilities 8,643 7,701 10,830 10,684 11,366 11,961 12,588 13,190 13,833

Shareholders' Equity

Common stock 1,290 1,358 1,469 1,654 1,838 2,023 2,208 2,393 2,559 Retained earnings 7,559 7,792 8,842 9,945 11,083 12,238 13,407 14,627 15,857 Accumulated other comprehensive gain (loss) (254) (639) (761) (761) (761) (761) (761) (761) (761)

Total Shareholders' Equity 8,595 8,511 9,550 10,838 12,160 13,500 14,854 16,259 17,655

Total Liabilities and Shareholders' Equity 17,237 16,212 20,380 21,522 23,526 25,460 27,441 29,449 31,487

Stryker CorporationCash Flow Statementin millionsFiscal Years Ending Dec. 31 2014 2015 2016Operating Activities Net earnings (loss) 515 1,439 1,647

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation 190 187 227

Amortization of intangible assets 188 210 319

Share-based compensation 77 86 97

Recall charges 940 349 158

Sale of inventory stepped-up to fair value at acquisition 27 7 36

Deferred income tax expense (benefit) 60 87 (46)

Excess income tax benefit from stock issued under employee stock plans - - (36)

Changes in operating assets and liabilities:

Accounts receivable (89) (151) (192)

Inventories (173) (115) (299)

Accounts payable 13 35 (16)

Accrued expenses & other liabilities 92 73 174

Recall related payments (98) (1,206) (243)

Income taxes 133 (290) (190)

Other operating assets & liabilities (93) 188 176

Net cash provided by operating activities 1,782 899 1,812

Investing ActivitiesAcquisitions, net of cash acquired (916) (153) (4,332)

Purchases of marketable securities (4,365) (1,715) (151)

Proceeds from sales of marketable securities 3,636 4,094 785

Purchases of property, plant & equipment (233) (270) (490)

Other investing, net - - (3)

Net cash (used in) provided by investing activities (1,878) 1,956 (4,191)

Financing ActivitiesProceeds from borrowings 1,601 1,576 1,094

Payments on borrowings (1,428) (2,272) (1,635)

Proceeds from issuance of long-term debt, net 986 744 3,453

Dividends paid (462) (521) (568)

Repurchases of common stock - - (13)

Excess income tax benefit from stock issued under employee stock plans - - 36

Other financing activities 32 32 (6)

Net cash provided by (used in) financing activities 629 (1,141) 2,361

Effect of exchange rate changes on cash & cash equivalents (77) (130) (45)

Change in cash & cash equivalents 456 1,584 (63)

Cash & cash equivalents at beginning of year 1,339 1,795 3,379

Cash & cash equivalents at end of year 1,795 3,379 3,316

Stryker CorporationCash Flow Statementin millionsFiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022CVOperating Activities Net earnings (loss) 1,744 1,864 1,957 2,051 2,141 2,235 Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation & Amortization 536 597 652 709 767 832 Changes in operating assets and liabilities:

Accounts receivable (108) (153) (134) (134) (132) (140)Inventories (65) (154) (136) (135) (134) (142)Deferred tax, net 74 75 98 - - - Prepaid expenses & other current assets (152) (47) (41) (41) (40) (43)Accounts payable 32 35 30 30 30 32 Accrued expenses & other liabilities (476) 77 67 67 66 70 Accrued compensation 31 59 52 51 51 54 Income taxes 70 (7) (10) 20 (0) 3 Dividends payable 14 15 10 11 11 12

Net cash provided by operating activities 1,699 2,361 2,546 2,630 2,760 2,913

Investing ActivitiesMarketable Securities (2) (2) (2) (2) (2) (2)Change in other non-current assets (18) (19) (19) (20) (20) (21)Investment in intangible assets (275) (104) (123) (341) (259) (378)Capital expenditure (change in gross PPE) (500) (460) (475) (500) (575) (575)

Net cash (used in) provided by investing activities (796) (585) (619) (863) (856) (976)

Financing ActivitiesChange in common stock 185 185 185 185 185 166 Change in ST debt (23) (21) (18) (17) (15) (13)Change in LT debt 184 502 441 440 435 461 Dividends paid (640) (727) (803) (882) (921) (1,006)Other financing activities 22 22 23 23 24 24

Net cash provided by (used in) financing activities (272) (39) (172) (251) (292) (368)

Change in cash & cash equivalents 631 1,737 1,755 1,517 1,612 1,569 Cash & cash equivalents at beginning of year 3,316 3,947 5,684 7,439 8,956 10,568 Cash & cash equivalents at end of year 3,947 5,684 7,439 8,956 10,568 12,137

Stryker CorporationCommon Size Income Statement% of total salesFiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CVSales:

Orthopaedics 42.93% 42.46% 39.05% 37.85% 37.08% 36.69% 36.34% 36.00% 35.66%MedSurg 39.08% 39.16% 43.21% 44.71% 45.44% 45.56% 45.56% 45.52% 45.47%Neurotechnology and Spine 17.99% 18.38% 17.74% 17.44% 17.48% 17.75% 18.10% 18.48% 18.87%

Total Sales 100% 100% 100% 100% 100% 100% 100% 100% 100%

Cost of Sales:

Cost of sales 32.34% 31.74% 31.81% 31.97% 31.97% 31.97% 31.97% 31.97% 31.97%Depreciation 1.96% 1.88% 2.00% 2.04% 2.21% 2.34% 2.47% 2.60% 2.75%

Gross Profit 65.70% 66.38% 66.18% 65.99% 65.83% 65.69% 65.56% 65.43% 65.29%

Operating Expenses:

Research, development & engineering expenses 6.35% 6.28% 6.31% 6.31% 6.31% 6.31% 6.31% 6.31% 6.31%Selling, general & administrative expenses 36.95% 36.30% 36.53% 36.59% 36.59% 36.59% 36.59% 36.59% 36.59%Recall charges, net of insurance recoveries 7.87% 2.98% 1.40% 2.19% 2.19% 2.19% 2.19% 2.19% 2.19%Amortization of intangible assets 1.94% 2.11% 2.82% 2.29% 2.29% 2.29% 2.29% 2.29% 2.29%

Total Operating Expenses 53.11% 47.67% 47.06% 47.38% 47.38% 47.38% 47.38% 47.38% 47.38%

Operating Income 12.88% 18.71% 19.13% 18.61% 18.45% 18.31% 18.18% 18.05% 17.90%

Other income (expense), net -0.89% -1.27% -2.16% -2.17% 0.00% 0.00% 0.00% 0.00% 0.00%Earnings (loss) before income taxes 11.99% 17.44% 16.96% 16.44% 16.37% 16.21% 16.08% 15.94% 15.79%

Income taxes 6.67% 2.98% 2.42% 2.34% 2.33% 2.31% 2.29% 2.27% 2.25%Net Earnings (Loss) 5.32% 14.47% 14.54% 14.10% 14.04% 13.90% 13.78% 13.67% 13.54%

Stryker CorporationCommon Size Balance Sheet% of total assetsFiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CVASSETSCurrent Assets:

Cash & cash equivalents 10.41% 20.84% 16.27% 18.34% 24.16% 29.22% 32.64% 35.88% 38.55%Marketable securities 18.59% 4.32% 0.33% 0.32% 0.31% 0.29% 0.28% 0.26% 0.25%Accounts receivable, net 9.12% 10.25% 9.65% 9.64% 9.47% 9.28% 9.10% 8.93% 8.79%Inventory 9.21% 10.11% 9.96% 9.74% 9.56% 9.37% 9.19% 9.01% 8.88%Prepaid expenses & other current assets 3.04% 3.48% 2.36% 2.94% 2.88% 2.83% 2.77% 2.72% 2.68%Deferred tax asset, current 3.20% 2.73% 1.21% 0.80% 0.42% 0.00% 0.00% 0.00% 0.00%

Total Current Assets 53.58% 51.73% 39.78% 41.78% 46.80% 50.98% 53.97% 56.81% 59.15%

Property, plant and equipment:Total property, plant & equipment 15.07% 16.84% 15.51% 17.01% 17.52% 18.05% 18.57% 19.26% 19.84%Less accumulated depreciation 8.70% 9.44% 7.81% 8.57% 9.09% 9.69% 10.33% 11.01% 11.74%

Net property, plant and equipment 6.37% 7.40% 7.70% 8.44% 8.43% 8.36% 8.24% 8.25% 8.10%Goodwill 24.28% 25.51% 31.19% 29.53% 27.02% 24.96% 23.16% 21.58% 20.19%Other intangibles, net 11.71% 11.07% 17.21% 16.26% 14.03% 12.18% 11.30% 10.19% 9.53%Other noncurrent assets 4.06% 4.30% 4.12% 3.98% 3.72% 3.52% 3.34% 3.18% 3.04%Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100%

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent Liabilities:

Accounts payable 1.91% 2.53% 2.14% 2.18% 2.14% 2.10% 2.06% 2.02% 1.99%Accrued compensation 3.46% 3.93% 3.76% 3.71% 3.64% 3.57% 3.50% 3.43% 3.38%Income taxes 1.93% 0.87% 0.20% 0.51% 0.44% 0.37% 0.41% 0.38% 0.37%Dividend payable 0.76% 0.88% 0.78% 0.80% 0.80% 0.78% 0.76% 0.75% 0.74%Accrued expenses & other liabilities 13.60% 8.66% 7.44% 4.84% 4.75% 4.66% 4.56% 4.48% 4.41%Current maturities of debt 4.22% 4.74% 1.12% 0.95% 0.79% 0.65% 0.55% 0.46% 0.38%

Total Current Liabilities 25.88% 21.61% 15.45% 12.99% 12.55% 12.11% 11.84% 11.52% 11.27%

Long-term debt, excluding current maturities 18.83% 20.07% 32.81% 31.92% 31.34% 30.69% 30.07% 29.50% 29.06%Other noncurrent liabilities 5.42% 5.83% 4.89% 4.73% 4.42% 4.18% 3.96% 3.77% 3.60%Total Liabilities 50.14% 47.50% 53.14% 49.64% 48.31% 46.98% 45.87% 44.79% 43.93%

Shareholders' EquityCommon stock 7.48% 8.38% 7.21% 7.68% 7.81% 7.95% 8.05% 8.12% 8.13%Retained earnings 43.85% 48.06% 43.39% 46.21% 47.11% 48.07% 48.86% 49.67% 50.36%Accumulated other comprehensive gain (loss) -1.47% -3.94% -3.73% -3.54% -3.23% -2.99% -2.77% -2.58% -2.42%

Total Shareholders' Equity 49.86% 52.50% 46.86% 50.36% 51.69% 53.02% 54.13% 55.21% 56.07%

Total Liabilities and Shareholders' Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Stryker CorporationCommon Size Balance Sheet% of total salesFiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CVASSETSCurrent Assets:

Cash & cash equivalents 18.55% 33.97% 29.28% 31.91% 42.80% 52.83% 60.19% 67.44% 73.53%Marketable securities 33.13% 7.04% 0.60% 0.57% 0.54% 0.52% 0.51% 0.50% 0.49%Accounts receivable, net 16.25% 16.71% 17.37% 16.78% 16.78% 16.78% 16.78% 16.78% 16.78%Inventory 16.41% 16.48% 17.92% 16.94% 16.94% 16.94% 16.94% 16.94% 16.94%Prepaid expenses & other current assets 5.42% 5.67% 4.24% 5.11% 5.11% 5.11% 5.11% 5.11% 5.11%Deferred tax asset, current 5.71% 4.44% 2.18% 1.40% 0.74% 0.00% 0.00% 0.00% 0.00%

Total Current Assets 95.46% 84.32% 71.59% 72.69% 82.90% 92.17% 99.52% 106.76% 112.84%

Property, plant and equipment:Total property, plant & equipment 26.84% 27.45% 27.91% 29.59% 31.03% 32.64% 34.25% 36.19% 37.84%Less accumulated depreciation 15.49% 15.39% 14.06% 14.91% 16.10% 17.52% 19.05% 20.69% 22.39%

Net property, plant and equipment 11.35% 12.06% 13.85% 14.68% 14.93% 15.12% 15.19% 15.50% 15.45%Goodwill 43.27% 41.58% 56.12% 51.38% 47.85% 45.13% 42.71% 40.56% 38.51%Other intangibles, net 20.86% 18.04% 30.98% 28.29% 24.85% 22.01% 20.83% 19.14% 18.17%Other noncurrent assets 7.22% 7.01% 7.41% 6.93% 6.60% 6.36% 6.15% 5.97% 5.79%Total Assets 178.16% 163.00% 179.96% 173.98% 177.13% 180.80% 184.41% 187.93% 190.75%

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent Liabilities:

Accounts payable 3.40% 4.12% 3.86% 3.79% 3.79% 3.79% 3.79% 3.79% 3.79%Accrued compensation 6.17% 6.40% 6.77% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45%Income taxes 3.44% 1.42% 0.35% 0.89% 0.78% 0.66% 0.76% 0.72% 0.70%Dividend payable 1.35% 1.43% 1.40% 1.40% 1.41% 1.40% 1.40% 1.40% 1.40%Accrued expenses & other liabilities 24.23% 14.12% 13.40% 8.42% 8.42% 8.42% 8.42% 8.42% 8.42%Current maturities of debt 7.51% 7.73% 2.01% 1.66% 1.39% 1.18% 1.01% 0.86% 0.73%

Total Current Liabilities 46.11% 35.22% 27.80% 22.60% 22.24% 21.90% 21.83% 21.64% 21.50%

Long-term debt, excluding current maturities 33.55% 32.71% 59.04% 55.54% 55.50% 55.48% 55.46% 55.44% 55.43%Other noncurrent liabilities 9.66% 9.50% 8.79% 8.23% 7.83% 7.55% 7.30% 7.09% 6.88%Total Liabilities 89.33% 77.43% 95.63% 86.37% 85.57% 84.93% 84.59% 84.17% 83.80%

Shareholders' EquityCommon stock 13.33% 13.65% 12.97% 13.37% 13.84% 14.37% 14.84% 15.27% 15.50%Retained earnings 78.13% 78.34% 78.08% 80.40% 83.44% 86.90% 90.10% 93.34% 96.06%Accumulated other comprehensive gain (loss) -2.63% -6.42% -6.72% -6.15% -5.73% -5.40% -5.11% -4.86% -4.61%

Total Shareholders' Equity 88.84% 85.57% 84.33% 87.61% 91.56% 95.86% 99.82% 103.76% 106.95%

Total Liabilities and Shareholders' Equity 178.16% 163.00% 179.96% 173.98% 177.13% 180.80% 184.41% 187.93% 190.75%

Stryker CorporationValue Driver Estimationin millionsFiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CVNOPLAT ComputationTotal Sales 9,675 9,946 11,325 12,370 13,282 14,082 14,881 15,670 16,507

Cost of sales 3,129 3,157 3,603 3,954 4,246 4,502 4,757 5,009 5,277 Research, development & engineering expenses 614 625 715 781 839 889 940 990 1,042 Selling, general & administrative expenses 3,575 3,610 4,137 4,527 4,860 5,153 5,445 5,734 6,040 Amortization of intangible assets 188 210 319 319 319 319 319 319 319 PLUS: Interest on operating lease 20 24 21 10 12 13 13 14 15

EBITA 2,189 2,368 2,572 2,799 3,030 3,232 3,434 3,633 3,844

Income tax provision 645 296 274 290 310 326 341 356 372 Tax shield on interest expense 16 15 33 38 39 42 45 47 50 Tax shield on amortized goodwill 27 30 45 40 43 46 49 51 54 Tax non-operating income (12) (18) (35) (38) (39) (42) (45) (47) (50) Tax shield on non-operating losses - - - - - - - - - Acquisition and integration related charges:

Inventory stepped up to fair value 4 1 5 - - - - - - Other acquisition and integration related 11 4 14 - - - - - -

Amortization of purchased intangible assets 27 30 45 45 45 45 45 45 45 Restructuring-related charges 17 19 18 - - - - - - Rejuvenate and other recall matters 109 42 23 - - - - - - Legal matters (8) (2) - - - - - -

Total adjusted taxes 1,766 2,224 2,444 2,595 2,809 2,998 3,187 3,373 3,572 PLUS: Change in deferred taxesDeferred tax, net (552) (442) (247) (173) (98) - - - - Previous deferred tax liability (asset) (35) 110 195 74 75 98 - - -

NOPLAT 1,179 1,892 2,392 2,496 2,786 3,096 3,187 3,373 3,572

Invested Capital ComputationNormal cash (4.8% of sales) 468 481 548 599 643 682 720 758 799 Accounts receivable 1,572 1,662 1,967 2,075 2,228 2,362 2,496 2,629 2,769 Inventory 1,588 1,639 2,030 2,095 2,250 2,385 2,521 2,654 2,796 Prepaid expenses & other current assets 524 564 480 632 678 719 760 800 843

Current operating asset 4,152 4,346 5,025 5,401 5,799 6,149 6,497 6,842 7,207 Account payable 329 410 437 469 504 534 565 595 626 Dividend payable 131 142 159 173 187 198 209 220 232 Accrued expenses & other current liabilities 2,344 1,404 1,517 1,041 1,118 1,185 1,252 1,319 1,389 Income taxes 333 141 40 110 104 93 114 113 116

Current operating liability 3,137 2,097 2,153 1,793 1,912 2,010 2,139 2,247 2,363 PPE, net 1,098 1,199 1,569 1,816 1,983 2,129 2,261 2,428 2,550 PV of operating leases 196 239 248 287 313 336 357 384 403 Intangible assets, net 2,018 1,794 3,508 3,500 3,300 3,100 3,100 3,000 3,000 Other noncurrent assets 699 697 839 857 876 896 915 935 956

Other operating asset 3,312 3,232 5,325 5,603 5,597 5,565 5,718 5,812 5,952 Total Invested Capital 4,327 5,481 8,197 9,211 9,484 9,703 10,076 10,407 10,797

Value DriversNOPLAT 1,179 1,892 2,392 2,496 2,786 3,096 3,187 3,373 3,572 BEG total invested capital 5,085 4,327 5,481 8,197 9,211 9,484 9,703 10,076 10,407 ROIC 23.18% 43.73% 43.64% 30.45% 30.24% 32.65% 32.84% 33.48% 34.32%

BEG total invested capital 5,085 4,327 5,481 8,197 9,211 9,484 9,703 10,076 10,407 ROIC 23.18% 43.73% 43.64% 30.45% 30.24% 32.65% 32.84% 33.48% 34.32%WACC 6.80% 6.80% 6.80% 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%EP 833 1,598 2,019 1,938 2,159 2,451 2,526 2,688 2,864

NOPLAT 1,179 1,892 2,392 2,496 2,786 3,096 3,187 3,373 3,572 PLUS: Beg total invested capital 5,085 4,327 5,481 8,197 9,211 9,484 9,703 10,076 10,407 LESS: Total invested capital 4,327 5,481 8,197 9,211 9,484 9,703 10,076 10,407 10,797 FCF 421 3,046 5,108 1,482 2,514 2,876 2,814 3,042 3,183

Stryker CorporationWeighted Average Cost of Capital (WACC) Estimation

WACC = [Re * (E/V)] + [Rd * (1-t) * (D/V)] WACC 6.80%Re = Cost of Equity Rd = Pretax cost of debtE = Market value of Equity D = Market value of DebtV = E + Dt = Marginal tax rate

Cost of Equity Rf 2.79%E(Rm) - Rf 4.63%Beta 0.87Re 6.83%

Cost of DebtRd 4.01%

Market Value of EquityShares outstanding 374,100,000 Share price 154.48$ E 57,790,968,000$

Market Value of DebtDebt (current and LT) 228,006,686$ PV of Operating Lease 247,960,899$ D 475,967,585$

Market Value of Firm (V) 58,266,935,585$

Weight of Equity 99.18%Weight of Debt 0.82%Weight of Preferred 0.00%Marginal tax rate 14.26%

Stryker CorporationDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.20% CV ROIC 34.32% WACC 6.80% Cost of Equity 6.83%

DCF ModelFiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022CVNOPLAT 2,496 2,786 3,096 3,187 3,373 3,572 Change in invested capital 1,014 272 220 373 331 389 Free Cash Flow (FCF) 1,482 2,514 2,876 2,814 3,042 3,183 CV at end of 2021 72,603 Discount Period 1 2 3 4 5 5PV of FCF 1,388 2,203 2,361 2,162 2,189 52,241

Value of Enterprise 62,544 Excess cash 2,768 Marketable securities 68 PV of operating leases (248)Other non-operating liability (996)ST debt (228)LT debt (6,686)Employee stock options (1,385)

Value of Equity 55,837 Total shares outstanding at end of FY16 374

Intrinsic Value of Stock 149.26$


EP ModelFiscal Years Ending 2017E 2018E 2019E 2020E 2021E 2022CVNOPLAT 2,496 2,786 3,096 3,187 3,373 3,572 Beginning Invested Capital 8,197 9,211 9,484 9,703 10,076 10,407 ROIC 30.45% 30.24% 32.65% 32.84% 33.48% 34.32%WACC 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%

EP 1,938 2,159 2,451 2,526 2,688 2,864 Continuing value (CV) 62,196 Discount Period 1 2 3 4 5 5PV of EP 1,815 1,893 2,012 1,941 1,934 44,753

Value of Enterprise 54,347 Beginning IC 8,197

Value of Operating Assets 62,544 Excess cash 2,768 Marketable securities 68 PV of operating leases (248)Other non-operating liability (996)ST debt (228) LT debt (6,686) Employee stock options (1,385)

Value of Equity 55,837 Total shares outstanding at end of FY16 374

Intrinsic Value of Stock 149.26$


Stryker CorporationDividend Discount Model (DDM) Model

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022CV

EPS 4.63$ 4.92$ 5.13$ 5.34$ 5.54$ 5.75$ 6.21% 4.29% 4.09% 3.73% 3.77%

Key Assumptions CV growth 4.42% CV ROE 12.66% Cost of Equity 6.83%

Future Cash Flows P/E Multiple (CV Year) 26.97 EPS (CV Year) 5.75 Future Stock Price 154.96 Dividends Per Share 1.70 1.92 2.10 2.30 2.38 2.59

Future Cash Flows 1.70 1.92 2.10 2.30 2.38 2.59 Periods 1 2 3 4 5 5Discounted Cash Flows $1.59 $1.68 $1.72 $1.76 $1.71 $111.35

Intrinsic Value of Stock $119.82


Stryker CorporationRelative Valuation

EPS EPSTicker Company Price 2017E 2018E P/E 17 P/E 18BSX Boston Scientifc Corp. $28.36 $1.26 $1.40 22.51 20.26 BAX Baxter International, Inc. $64.04 $2.42 $2.71 26.46 23.63 BDX Becton, Dickinson and Company $219.23 $9.48 $10.56 23.13 20.76 HRC Hill-Rom $76.18 $3.86 $4.26 19.74 17.88 ZBH Zimmer Biomet Holdings, Inc. $110.75 $8.07 $8.35 13.72 13.26

Average 21.11 19.16

SYK Stryker Corporation $154.48 4.63 4.92 33.4 31.4

Implied Relative Value: P/E (EPS17) P/E (EPS18)

Adjusted P/E (EPS17) (November 10, 2017) 101.43$

97.74$ 94.21$

Adjusted P/E (EPS18) (November 10, 2017) 97.77$

Stryker CorporationKey Management Ratios

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022CV

Liquidity RatiosCurrent Ratio 2.07 2.39 2.58 3.22 3.73 4.21 4.56 4.93 5.25 Quick Ratio 1.47 1.64 1.70 2.18 2.70 3.20 3.55 3.91 4.22 Cash Ratio 0.40 0.96 1.05 1.41 1.92 2.41 2.76 3.12 3.42

Activity or Asset-Management RatiosAccounts Recievable Turnonver Ratio 6.26 6.15 6.24 6.12 6.17 6.14 6.13 6.12 6.12 Inventory Turnover Ratio 6.43 6.16 6.17 6.00 6.11 6.08 6.07 6.06 6.06 Average Collection Period 58.29 59.34 58.48 59.63 59.13 59.49 59.59 59.69 59.68

Financial Leverage RatiosDebt-to-Equity Ratio 1.01 0.90 1.13 0.99 0.93 0.89 0.85 0.81 0.78 Debt Ratio 0.46 0.47 0.72 0.65 0.62 0.59 0.57 0.54 0.53 Total Debt to Capitalizaiton 0.23 0.25 0.34 0.33 0.32 0.31 0.31 0.30 0.29

Profitability RatiosOperating Margin 12.88% 18.71% 19.13% 18.61% 18.45% 18.31% 18.18% 18.05% 17.90%Gross Margin 65.70% 66.38% 66.18% 65.99% 65.83% 65.69% 65.56% 65.43% 65.29%Return on Assets 2.99% 8.88% 8.08% 8.10% 7.93% 7.69% 7.47% 7.27% 7.10%Return on Equity 5.99% 16.91% 17.25% 16.09% 15.33% 14.50% 13.81% 13.17% 12.66%

Payout Policy RatiosDividend Payout Ratio 89.71% 36.21% 34.49% 36.72% 39.00% 41.00% 43.00% 43.00% 45.00%Total Payout Ratio 89.71% 36.21% 34.49% 36.72% 39.00% 41.00% 43.00% 43.00% 45.00%

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending 151.776483525062 Leases Fiscal Years Ending 166.628558687955 Leases2017 90 2016 69 2015 60 2014 51 2013 472018 47 2017 51 2016 45 2015 53 2014 372019 34 2018 39 2017 33 2016 33 2015 322020 24 2019 28 2018 25 2017 26 2016 262021 15 2020 20 2019 19 2018 21 2017 23Thereafter 59 Thereafter 56 Thereafter 34 Thereafter 38 Thereafter 37Total Minimum Payments 269 Total Minimum Payments 263 Total Minimum Payments 216 Total Minimum Payments 222 Total Minimum Payments 202Less: Interest 21 Less: Interest 24 Less: Interest 20 Less: Interest 22 Less: Interest 20PV of Minimum Payments 248 PV of Minimum Payments 239 PV of Minimum Payments 196 PV of Minimum Payments 200 PV of Minimum Payments 182

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 2.00% Pre-Tax Cost of Debt 3.00% Pre-Tax Cost of Debt 4.01% Pre-Tax Cost of Debt 4.01% Pre-Tax Cost of Debt 4.01%Number Years Implied by Year 6 Payment 3.9 Number Years Implied by Year 6 Payment 2.8 Number Years Implied by Year 6 Payment 1.8 Number Years Implied by Year 6 Payment 1.8 Number Years Implied by Year 6 Payment 1.6

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 90 87.4 1 69 67.0 1 60 58.3 1 51 49.5 1 47 45.62 47 44.3 2 51 48.1 2 45 42.4 2 53 50.0 2 37 34.93 34 31.1 3 39 35.7 3 33 30.2 3 33 30.2 3 32 29.34 24 21.3 4 28 24.9 4 25 22.2 4 26 23.1 4 26 23.15 15 12.9 5 20 17.3 5 19 16.4 5 21 18.1 5 23 19.86 & beyond 15 50.9 6 & beyond 20 45.7 6 & beyond 19 26.4 6 & beyond 21 29.5 6 & beyond 23 28.9PV of Minimum Payments 248.0 PV of Minimum Payments 238.6 PV of Minimum Payments 195.9 PV of Minimum Payments 200.4 PV of Minimum Payments 181.6

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 14.9Average Time to Maturity (years): 5.90Expected Annual Number of Options Exercised: 2.53

Current Average Strike Price: 73.14$ Cost of Equity: 6.83%Current Stock Price: $154.48

2017E 2018E 2019E 2020E 2021E 2022CVIncrease in Shares Outstanding: 2.53 2.53 2.53 2.53 2.53 2.27Average Strike Price: 73.14$ 73.14$ 73.14$ 73.14$ 73.14$ 73.14$ Increase in Common Stock Account: 185 185 185 185 185 166

Change in Treasury Stock 0 0 0 0 0 0Expected Price of Repurchased Shares: 154.48$ 165.03$ 176.31$ 188.35$ 201.22$ 214.97$ Number of Shares Repurchased: - - - - - -

Shares Outstanding (beginning of the year) 374 377 379 382 384 387Plus: Shares Issued Through ESOP 3 3 3 3 3 2Less: Shares Repurchased in Treasury - - - - - - Shares Outstanding (end of the year) 377 379 382 384 387 389

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol SYKCurrent Stock Price $154.48Risk Free Rate 2.79%Current Dividend Yield 1.14%Annualized St. Dev. of Stock Returns 20.03% implied

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 14.9 73.14 5.90 $92.95 1,384.96$

Total 14.9 73.14$ 5.90 92.95$ 1,384.96$

DCF

149.26$ 0.83 0.84 0.85 0.86 0.87 0.88 0.89 0.90 0.91

2.71% 160.36$ 158.42$ 156.52$ 154.66$ 152.30$ 151.05$ 149.31$ 147.59$ 145.91$

2.73% 159.51$ 157.59$ 155.71$ 153.87$ 151.53$ 150.29$ 148.56$ 146.86$ 145.20$

2.75% 158.68$ 156.78$ 154.91$ 153.08$ 150.77$ 149.54$ 147.82$ 146.14$ 144.49$

2.77% 157.85$ 155.97$ 154.12$ 152.31$ 150.01$ 148.79$ 147.09$ 145.42$ 143.78$

2.79% 157.03$ 155.16$ 153.33$ 151.54$ 149.26$ 148.05$ 146.37$ 144.71$ 143.08$

2.81% 156.22$ 154.37$ 152.55$ 150.77$ 148.51$ 147.32$ 145.65$ 144.00$ 142.39$

2.83% 155.41$ 153.58$ 151.78$ 150.02$ 147.78$ 146.59$ 144.93$ 143.30$ 141.71$

2.85% 154.62$ 152.80$ 151.01$ 149.26$ 147.04$ 145.87$ 144.22$ 142.61$ 141.02$

2.87% 153.83$ 152.02$ 150.25$ 148.52$ 146.32$ 145.16$ 143.52$ 141.92$ 140.35$

DCF

149.26$ 1.80% 1.90% 2.00% 2.10% 2.20% 2.30% 2.40% 2.50% 2.60%

6.40% 154.17$ 156.92$ 159.80$ 162.81$ 165.96$ 169.27$ 172.74$ 176.39$ 180.24$

6.50% 150.36$ 152.97$ 155.70$ 158.55$ 161.54$ 164.66$ 167.94$ 171.39$ 175.01$

6.60% 146.70$ 149.19$ 151.78$ 154.48$ 157.31$ 160.27$ 163.38$ 166.63$ 170.04$

6.70% 143.20$ 145.56$ 148.02$ 150.59$ 153.28$ 156.08$ 159.02$ 162.10$ 165.32$

0.00% 139.70$ 141.94$ 144.28$ 146.71$ 149.26$ 151.91$ 154.69$ 157.60$ 160.64$

6.90% 136.61$ 138.75$ 140.98$ 143.30$ 145.72$ 148.25$ 150.89$ 153.65$ 156.54$

7.00% 133.50$ 135.54$ 137.67$ 139.88$ 142.18$ 144.59$ 147.09$ 149.71$ 152.45$

7.10% 130.51$ 132.46$ 134.49$ 136.60$ 138.79$ 141.07$ 143.46$ 145.94$ 148.54$

7.20% 127.63$ 129.50$ 131.43$ 133.44$ 135.53$ 137.71$ 139.97$ 142.33$ 144.80$

DCF

149.26$ 30.32% 31.32% 32.32% 33.32% 32.84% 35.32% 36.32% 37.32% 38.32%

6.40% 164.55$ 164.94$ 165.30$ 165.64$ 165.96$ 166.26$ 166.55$ 166.82$ 167.08$

6.50% 160.17$ 160.54$ 160.89$ 161.22$ 161.54$ 161.83$ 162.11$ 162.37$ 162.62$

6.60% 155.98$ 156.34$ 156.69$ 157.01$ 157.31$ 157.60$ 157.87$ 158.12$ 158.37$

6.70% 151.98$ 152.34$ 152.67$ 152.98$ 153.28$ 153.56$ 153.82$ 154.07$ 154.30$

0.00% 148.00$ 148.34$ 148.67$ 148.97$ 149.26$ 149.53$ 149.78$ 150.03$ 150.26$

6.90% 144.49$ 144.83$ 145.15$ 145.44$ 145.72$ 145.99$ 146.24$ 146.47$ 146.70$

7.00% 140.98$ 141.31$ 141.62$ 141.91$ 142.18$ 142.44$ 142.68$ 142.91$ 143.13$

7.10% 137.62$ 137.94$ 138.24$ 138.52$ 138.79$ 139.04$ 139.28$ 139.50$ 139.71$

7.20% 134.39$ 134.70$ 134.99$ 135.27$ 135.53$ 135.77$ 136.01$ 136.23$ 136.43$

DCF

149.26$ 1.80% 1.90% 2.00% 2.10% 2.20% 2.30% 2.40% 2.50% 2.60%

30.32% 138.75$ 140.92$ 143.18$ 145.54$ 148.00$ 150.56$ 153.25$ 156.06$ 159.01$

31.32% 139.01$ 141.20$ 143.48$ 145.86$ 148.34$ 150.93$ 153.65$ 156.48$ 159.45$

32.32% 139.25$ 141.46$ 143.76$ 146.16$ 148.67$ 151.28$ 154.01$ 156.88$ 159.87$

33.32% 139.48$ 141.71$ 144.03$ 146.45$ 148.97$ 151.61$ 154.36$ 157.25$ 160.27$

32.84% 139.70$ 141.94$ 144.28$ 146.71$ 149.26$ 151.91$ 154.69$ 157.60$ 160.64$

35.32% 139.90$ 142.16$ 144.51$ 146.97$ 149.53$ 152.20$ 155.00$ 157.92$ 160.99$

36.32% 140.09$ 142.37$ 144.74$ 147.21$ 149.78$ 152.48$ 155.29$ 158.24$ 161.32$

37.32% 140.27$ 142.56$ 144.95$ 147.43$ 150.03$ 152.74$ 155.57$ 158.53$ 161.63$

38.32% 140.45$ 142.75$ 145.15$ 147.65$ 150.26$ 152.98$ 155.83$ 158.81$ 161.93$

CV Growth of NOPLAT

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CV Growth of NOPLAT

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stryker corporation (nyse: syk) healthcare...stryker corporation (syk) is a medical technology...

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