Stryker vs. Medtronic: Which Stock's the Better Buy?


Medical device makers Medtronic and Stryker are at the top of an industry on the move. Both are big names in the business, have pulled in double-digit gains to start the year, and are worth it for investors to consider adding to their portfolios. But when pitting these stocks head-to-head for your investment over the long term, which is the better buy?

Starting off with Stryker
Stryker did well in 2012, growing sales by more than 4% year-over-year despite falling earnings. The sluggish comeback from the recession has hurt medical device sales, but with the economy finally looking up, Stryker's predicting good things. The company expects full-year earnings per share of between $4.25 and $4.40 in 2013, a range that would smash 2012's result by between 25% and 30%.

Why the optimism? Stryker expects the orthopedics market to rise in 2013, and with nearly 44% of sales stemming from its orthopedics-centered "Reconstructive" division, the company would welcome a boost. Reconstructive sales grew by 4.4% last year, but sluggish growth from hip devices -- the division's largest unit -- weighed that number down. The obesity epidemic in the United States and other advanced economies, coupled with the aging of the baby boomers, will certainly help the orthopedics division in the long run -- a great opportunity for long-term investors to consider -- but short-term worries could hamper growth in the near future.

The ongoing series of lawsuits against hip device recalls should worry Stryker investors, however. This company hasn't been immune from the allegations that have been thrown against competitors such as Johnson & Johnson : Stryker has had legal troubles following its recall of the Rejuvenate and ABG II hip stem implants last year. Stryker has nowhere near the financial power to battle lawsuits like J&J -- a company whose orthopedics sales alone nearly outpace Stryker's total revenue -- and investors need to hope for a recall-free future.

Fortunately, the company's stepped up its efforts in other areas. Stryker's neurotechnology and spine business has grown from 14% of total sales to 18% in two years as the fastest-growing division in the company. The segment grew by more than 10% alone last year, representing some real revenue power for Stryker; if orthopedics sales pick up as expected, the company's optimistic profit forecasts won't seem so high after all.

Medtronic won't be left behind
Stryker's looking up, but Medtronic's not going to concede that easily. The largest purely medical device company on the market topped earnings projections last quarter and saw revenue grow 4%, and Medtronic has its own businesses demanding the attention of growth investors everywhere.

The company's Resolute drug-eluting stent has powered its coronary business to standout growth: Over the past nine months, the division's grown sales by 14%. It's one of Medtronic's best-performing divisions, and the recent launch of the Resolute Integrity stent in Japan and U.S. -- to "strong consumer acceptance," according to Medtronic's most recent quarterly filing -- promises more good things to come from this business.

That can't be said about all of Medtronic's heart-related businesses, however. The company's mired in the cardiac rhythm management, or CRM, industry's decline -- an unfortunate trend considering the business makes up more than a quarter of Medtronic's total sales. Its 3% decline in CRM sales over the past nine months isn't as bad a hit as some competitors; Boston Scientific lost 7% in full-year CRM sales in 2012 as the industry has shown no mercy to any company involved. Still, Medtronic's high exposure to this struggling area will keep revenue growth down, especially considering that the mature CRM market isn't expected to see much growth in the U.S. and Europe.

Still, Medtronic's smaller divisions, such as its endovascular and neuromodulation units, have shown strong growth and optimism for the future. Is that enough for Medtronic to beat out Stryker, however?

Battle for the buy
One look at the basics gives Medtronic the early edge. The company's superior dividend -- at a payout ratio only marginally higher than Stryker's -- will appeal to income investors, while Medtronic is also considerably cheaper on a P/E basis and boasts a greater net profit margin.

Both companies have also done a good job expanding beyond U.S. borders. Medtronic boasts nearly 45% of its sales from international sources, including almost 16% of revenue from the fast-growing Asia-Pacific region. While Stryker has been more reliant on American revenue -- only 35% of the company's sales came from abroad in 2012 -- its purchase of Chinese medical device firm Trauson Holdings earlier this year gives it a leg up in the second-largest economy that's become a must-have market for health care firms.

I would love to tell you to buy both stocks, but I've got to pick a winner between these two top-tier medical device companies. Stryker's the smaller company, but its orthopedics unit -- even with lawsuits raining down on hip recalls across the industry -- is well-positioned to capitalize on the future of obesity and aging, while its growth of other, smaller business units is diversifying sales in case of a downturn.

While Medtronic's a strong company and worth a look from any investor, I can't shake the concerns over the CRM business, particularly given Medtronic's significant revenue from the industry. That industry isn't heading for greener pastures any time soon, and although Medtronic's also developing its smaller, higher-growth businesses, CRM woes could hamper growth in the long term.

There you have it: In the battle between two top-notch health care stocks, Stryker is your winner by a hair. From long-term growth to smart moves like the Trauson purchases, Stryker is worth the investment for long-term investors everywhere.

Is bigger really better?
Medtronic's the largest purely medical device player, but if size is your thing, look no further than health care's goliath: Johnson & Johnson. Involved in everything from baby powder to biotech, Johnson & Johnson's critics are convinced that the company is spread way too thin. If you want to know if J&J is nothing but a bloated corporate whale -- or a well-diversified giant that's perfect for your portfolio -- check out The Fool's new premium report outlining the Johnson & Johnson story in terms that any investor can understand. Claim your copy by clicking here now.

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Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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