Rule #1 Finance Blog

With Investor Phil Town

HOMEWORK: STRYKER CORP. (SYK)

Lyn did a great job of analyzing Stryker (SYK), a maker of orthopedic products.  Read on:

Phil,

Here’s my homework.  If it’s any good, maybe you can post some of this on the website. First the BIG 5 numbers:

For the past 10 years if I figured correctly using the Rule of 72 method…

Equity Growth: 24%
EPS: 17%
SALES GROWTH: 17%
ROIC: 18%
Cash: 18%

One number I didn’t like was that the EPS Growth for last year was only 1.7% Why would that be?

MEANING: Well, I have two doctors in my family (brother and sister) and a physical therapist (sister). So I like the medical field. And, Eric just spent the entire summer putting in some LONG hours working on an addition (around 1 million sq. ft.) to the Stryker Corporation building. So it’s kind of personal to him as well. Plus he may need new joints soon from all the hard work he does. And they are local here in West Michigan (a great place to live!). Also, I have many friends and relatives who are very active baby boomers, quite like yourself, who just might mess up a knee, elbow or joint skiing this winter or just falling down the stairs. (Like Pete did last winter!) Of course, as I get older…it probably will become even more meaningful.

MOAT: They are leaders in their industry and makers of OP-1 which is an implant whch is know to induce both growth formation. It’s not fully being used in the U.S. because of FDA restrictions right now… but in a few other countries it is. They have a huge variety of products and services that benefit a wide range of medical needs worldwide. They monopolize the hospital bed business as well.

MANAGEMENT: The CEO Steve MacMillan seems to have a BAG. He wants to move the company forward and expand the bio- science division. He is passionate about raising the bar and often surpass their own ambitious goals. The stryker family still owns about 25% of the company. The CEO that just retired, John Brown, was awesome. He definitely had a BAG. The one thing that concerns me… Can Steve keep the company going like John Brown did? Steve has some BIG shoes to fill.

MOS: I get a sticker price of about $70-$75. It’s currently selling for $47.50. So there is a little room… not quite half like you like. But it’s getting closer to that.

Lyn

Lyn did a fantastic job. Here’s what I said:

Hi Lyn,

This is great stuff!  You are doing it, girl!

So – Secrets Moat.  Brand Moat.  Backed up by long term numbers with some stumbling lately that is bringing the stock price down below its long term value.  Family owned still with a new CEO who may or may not be as good as the winner who just retired.  And it has enough of an MOS to play.

Let’s see what it looks like to me:

  • Assuming I lived in beautiful Western Michigan and understood this business, the first thing I look at is ROIC.  At 18% it’s getting awesomer every year.  Great. 
  • Now book value per share or equity growth.  I get 22%.  That becomes the growth rate unless other things take it down from there. 
  • EPS is next: Growing at over 23% then lately at 27% until last year, when it just grew a tad.  Gotta find out what that was.  A onetime thing? 
  • Sales growing at 17%. 
  • Free cash growing at 21%.  Almost no debt.  Wow.  Nice numbers.  Support the idea of a Secrets Moat big time. 

Looking at this I’d put the growth at the equity number:  22%.  Now, what do the analysts say?  They say 20%. Okay.  More conservative.  Let’s use that.

Current EPS is at $1.30.  We’re going to grow that number at 20% per year for ten years and get a future EPS of $8.05.  So what PE to use?  Lyn didn’t say what she used but we know it isn’t going to be more than 40 because that’s double our growth rate.  The historical PE is about 40 with highs at 55.  So 40 is the multiple.  That puts the future price at $322.  To get a 15% return I have to pay one quarter of that today or less.  $80.

Lynn’s sticker price was less – $70 to $75.  She might have used a smaller growth rate or a smaller PE.  But we’re using the analyst estimate and a decent PE so we’re okay at $80. 

But I need a margin of safety because I’m a river guide … so I want to pay $40 or less.  It’s selling for $47.

Now I’m looking at a ten year chart.  This one is coming off an all-time high of $56. And the chart is amazing.  Just about straight up.

I gotta tell you Ms. Lyn of Western Michigan.  This is a pretty good looking business.  I’m going to dig in and see if I can find a reason to not buy it!  Maybe it will keep going down so low we HAVE to buy it!

So what next?  Read the annual reports.  Listen to the conference calls on their website.  See if you can find out what they said about this sudden halt to earnings growth.  Is this one time or can we expect more?

This is where us little guys have such a HUGE advantage – we don’t have to invest and when we do invest, we can invest when the news is still bad because we have the arrows or tech tools.

You are AWESOME, Lyn.  Great job.

Now go play with your kids.

Phil