Stryker Corporation, a prominent player in the medical technologies industry, has garnered widespread attention due to its substantial market capitalization of over $100 billion. With its strong presence in the market, Stryker's revenue streams are primarily derived from its MedSurg & Neurotechnology division, accounting for 58% of its total revenues, while the remaining 42% is generated from Orthopaedics and Spine segments.
Over the past 15 years, Stryker has demonstrated consistent revenue growth, boasting a compound annual growth rate of 7.8%. The company's net income has also exhibited a commendable growth rate of 8.9% during the same period. Moreover, Stryker has made notable acquisitions, totaling over $10 billion in the last five years.
This article aims to evaluate the valuation of Stryker, employing conventional metrics such as price to earnings and price to sales ratios, alongside a systematic Cash Flow Returns On Investments (CFROI) analysis.
Key Takeaways
- Stryker is a major player in medical technologies with a market cap of over $100bn.
- The company's revenues have grown at a 7.8% CAGR over 15 years, with net income growing by 8.9% over the same period.
- Stryker has made multiple acquisitions, totaling over $10bn in the last five years.
- The company is considered overvalued with too much growth baked into its valuation.
Company Overview and Financial Performance
Stryker's strong financial performance and comprehensive company overview highlight its position as a major player in the medical technologies industry. With a market cap of over $100 billion, Stryker has consistently demonstrated positive financial trends. Over the past 15 years, the company has achieved a revenue growth rate of 7.8% and a net income growth rate of 8.9%.
Stryker's market position is evident through its revenue distribution, with 58% coming from the MedSurg & Neurotechnology division and 42% from Orthopaedics and Spine segments. The company has also made strategic acquisitions totaling over $10 billion in the last five years. These figures, along with a steady increase in revenue per share and a comfortable debt-to-EBITDA ratio, solidify Stryker's position as a leading player in the industry.
Revenue Growth and Acquisitions
The growth of Stryker's revenue and its strategic acquisitions have played a pivotal role in establishing its strong market position in the medical technologies industry. Over the past 15 years, Stryker has achieved a compound annual growth rate (CAGR) of 7.8% in revenue, resulting in a significant increase in net income.
The company's revenue per share has grown at a CAGR of 7.5% from 2008 to 2023. Stryker's acquisitions, totaling over $10 billion in the last five years, have had a notable impact on its growth and expansion.
However, it is important to assess the sustainability of this revenue growth and the long-term impact of these acquisitions on the company's financial performance.
Key Value Drivers and Analysis
A thorough analysis of the key value drivers reveals important insights into the valuation of Stryker stock.
- Profitability analysis: Return on Equity (ROE) is a key value driver, which can be calculated as net income divided by stockholders' equity. ROE can be further decomposed into profit margins, asset turnover, and equity multiplier. Stryker's margins have remained stable over the years, indicating consistent profitability.
- Return on equity decomposition: Asset turnover has been falling, suggesting that more assets are required to generate the same amount of revenue. However, returns on Cash Generating Assets (ROCGA) have remained stable when excluding goodwill.
- Conventional valuation: Stryker is trading above historical and industry averages on valuation matrices such as price to earnings and price to sales ratios. This indicates overvaluation, as the PE ratio is 26.8x and the PS ratio is 5.2x based on forecast FY23. Growth does not seem to justify the high valuation ratios.
In light of these findings, it is evident that Stryker is overvalued and caution should be exercised when considering an investment in the stock.
Conventional Valuation Metrics
Conventional valuation metrics indicate that the stock of this medical technology company may be overvalued. Price to earnings (PE) and price to sales (PS) ratios have risen significantly in recent years, with Stryker trading above historical and industry averages on all valuation matrices.
Using forecast FY23, the PE ratio is 26.8x and the PS ratio is 5.2x, indicating overvaluation. Comparing valuation methods, growth does not seem to be the reason for the high valuation ratios. Stryker is considered overvalued with too much growth baked into its valuation.
Additionally, the Cash Flow Returns On Investments (CFROI) valuation analysis suggests that the warranted value of Stryker has been decreasing over time. Based on these indicators, caution should be exercised when considering an investment in Stryker's stock.
Cash Flow Returns On Investments (CFROI) Valuation
When analyzing the valuation of Stryker, an important aspect to consider is the Cash Flow Returns On Investments (CFROI) valuation method. This valuation methodology provides insights into the company's ability to generate cash flow returns from its investments.
Here are three key points to consider in CFROI analysis:
- CFROI Calculation: CFROI is calculated by dividing the cash flow generated by an investment by the amount of capital invested. It takes into account both the timing and magnitude of cash flows, providing a more comprehensive measure of investment performance.
- Historical CFROI Trends: By analyzing Stryker's historical CFROI trends, we can assess the company's ability to generate consistent cash flow returns over time. This helps identify if there have been any significant changes in the company's investment efficiency and profitability.
- Forecasted CFROI: Forecasting future CFROI allows us to estimate the potential cash flow returns on Stryker's future investments. This helps in determining the intrinsic value of the stock and assessing whether it is overvalued or undervalued based on the expected returns.
Incorporating CFROI analysis into the valuation methodology provides a deeper understanding of Stryker's investment performance and can help investors make more informed decisions.
Conclusion and Recommendation
Based on the analysis conducted, it is recommended to assign a HOLD rating to Stryker due to its overvaluation and the company's proven history of strong growth and returns.
The conventional valuation metrics, such as price to earnings and price to sales ratios, indicate that Stryker is trading above historical and industry averages, suggesting overvaluation.
Additionally, the systematic Cash Flow Returns On Investments (CFROI) based DCF valuation also points towards overvaluation, with the warranted value of Stryker decreasing over time.
Despite being overvalued, Stryker is a high-quality company with a track record of strong growth and returns. Therefore, investors may consider holding onto their Stryker stock, as the market may not accurately price in the company's growth potential.
However, investors should closely monitor the stock and be prepared to sell if the valuation becomes unsustainable.
Frequently Asked Questions
What Is the Current Market Share of Stryker in the Medical Technologies Industry?
Stryker currently holds a significant market share in the medical technologies industry. The company's growth strategies have contributed to its strong position, allowing it to capitalize on opportunities and maintain a competitive edge in the market.
How Does Stryker Plan to Address the Falling Asset Turnover and Maintain Revenue Growth?
Stryker aims to address falling asset turnover and maintain revenue growth through strategic initiatives such as optimizing operational efficiency, expanding product offerings, and pursuing targeted acquisitions. These efforts are aimed at maximizing resource utilization and driving top-line growth.
What Are the Main Factors Contributing to the Stable Profit Margins of Stryker Over the Years?
The main factors contributing to the stable profit margins of Stryker over the years include effective cost management, efficient operations, and strategic pricing. Additionally, the company's revenue growth strategy focuses on organic growth, market expansion, and targeted acquisitions.
How Does Stryker's Valuation Compare to Its Competitors in the Medical Technologies Industry?
Stryker's valuation compared to its competitors in the medical technologies industry is relatively high, indicating potential overvaluation. Despite this, Stryker's strong growth potential and history of strong returns make it a valuable investment option.
Are There Any Specific Risks or Challenges That Could Impact Stryker's Future Performance and Valuation?
There are various risks and challenges that could impact Stryker's future performance and valuation, including regulatory changes, market competition, product recalls, global economic conditions, and disruptions in the healthcare industry.