Stryker Earnings: True to Historical Patterns, Excellent Execution and New Products Drive Growth

As one of the best operators in medical technology, wide-moat Stryker SYK delivered another quarter of strong performance that slightly edged ahead of our expectations on the top and bottom lines. However, small adjustments to our near-term assumptions weren’t enough to materially shift our fair value estimate.

Quarterly revenue growth of 12% (in constant currency) year over year was fueled by double-digit growth from instruments, trauma and extremities, and medical. In addition to the firm’s impressive execution, Stryker is also formidable when it comes to its pipeline. For example, Stryker recently entered limited launch with its new 1788 endoscopic camera, and full launch should get underway in the third quarter. We expect this new platform to accelerate endoscopy growth from the midsingle digits seen in the second quarter to low-double digits in 2024.

Stryker continues to set the pace for growth in large joints, with quarterly knee and hip sales up 13% and 9%, respectively. Stryker edged out Zimmer Biomet’s second-quarter 11% knee growth, and far exceeded Johnson & Johnson’s 5% increase. We think Stryker’s knee growth benefits from the significant proportion of higher-margin cementless knees, so on a unit basis, its knee growth may be closer to that of Zimmer Biomet’s. However, thanks to Stryker’s head start on cementless knees, the firm anticipates five-year data on those knees will be published in the near term. This data should give us a sense of how well cementless knees hold up in the midterm, though we recognize that joint implants are designed to last much longer than five years.

Since the acquisitions of Wright Medical and Vocera, Stryker has made reducing leverage its capital allocation priority. Now that the firm is approaching the lower end of debt/EBITDA typically seen with medical technology firms, we think the potential for more M&A activity should emerge next year.