Is Stryker Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Stryker fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Stryker's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?

• Valuation: Is share price growing in line with earnings per share?

• Opportunities: Is return on equity increasing while debt to equity declines?

• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Stryker's key statistics:

SYK Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

SYK Return on Equity data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Stryker earns four out of nine passing grades today in a generally mediocre performance boosted by strong dividend metrics. Over the past three years, modest revenue growth has combined with falling profit margins to suppress the company's fundamentals, which have largely remained flat on the bottom line. Stryker could turn this mediocrity around with a strong period of revenue growth coupled with margin expansion, but how likely is it that the company will manage both top- and bottom-line improvements over the coming year? Let's dig a little deeper to find out.

Medical equipment manufacturers like Stryker have been betting heavily on lucrative opportunities in the booming Chinese health care industry. My fellow Fool Leo Sun notes that the rapid growth of China's aging population and its middle-class incomes will fuel demand for both high-quality medical devices and surgical products in China. The number of Chinese citizens over the age of 60 is expected to reach around 440 million by 2050, which is a larger elderly population than the total population of any other country, except for India. In addition, China's emerging middle class should drive increased interest in "premium" surgical procedures of the sort Stryker supplies.

Early this year, Stryker acquired Hong Kong-based Trauson Holdings, which solely dominates the market of pelvic reconstruction plates, implants and trauma products in China, for $764 million in cash. Leo Sun points out that the acquisition will help extend Stryker's reach down-market, as its products are currently only sold to upper-class hospitals, and Trauson is well-represented at the lower end of China's health-care pyramid.

Stryker's still growing in the U.S. as well -- it recently bagged an $85.5 million contract from the U.S. Department of Defense to supply orthopedic hip and knee procedural packages for servicemen. However, Obamacare looms as a potential long-term obstacle in the way of Stryker's effort to expand its profit margins, as it will have to pay an additional 2.3% tax on sales of its medical devices, which is equivalent to a 15% surtax on medical-device income. As a result, the company has had to cut 1,170 jobs, or 5% of its workforce, to offset the new tax. These cuts are estimated to result in savings of more than $100 million per year.

Putting the pieces together
Today, Stryker has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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The article Is Stryker Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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