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This Important Acquisition Is Starting to Pay Off for Stryker

Stryker (NYSE: SYK) acquired Mako Surgical in 2013. It did so with a plan to combine the company's leadership with Mako's innovative robotic arm assisted surgical products in an effort to transform orthopedics. In 2017, that plan came to fruition with what the company described as a first and only robotic arm assisted technology for total knee and hip replacement procedures.

By the end of 2019, Stryker finally felt justified in its purchase, which was originally considered a steep price at $1.65 billion. The company delivered the strongest robot quarter since the launch of Mako, and it celebrated 40 consecutive years of sales growth since the company went public. Then, the COVID-19 pandemic hit. As a result of the public health crisis, medical procedures were postponed, sales slowed, and its stock price tanked. In Stryker's most recent quarter however, earnings per share (EPS) topped estimates, and revenue increased slightly, though it still missed the mark from some analysts' perspectives.

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Delays are a minor setback

For Stryker, the time to recoup and strengthen its revenues should not take long. A human's physical condition, such as the need for knee or hip replacement, won't miraculously fix itself, though some of us might wish that weren't the case as we get older. At some point, the surgical procedures that were delayed because of the pandemic should take place.

On top of that, Stryker is expecting big things from its spinal surgery line of products in 2021, following 3.5% sales growth in that area for the fourth quarter of 2020. The wildcard for Stryker is whether it can develop and to go to market with a successful robotic spine surgery product, which may either come from its more recent acquisition of K2M or further development of the Mako system while facing growing competition.

Competitors in the water

With Mako leading the way, Stryker is navigating murky waters. The company is holding steadfast in its determination to grow revenues and to focus on the Mako system for knee and hip replacement procedures. However, as with any industry that is projected for strong growth, this one is packed with strong competition. The battle for dominance in the medical technology (MedTech) space is getting especially intense in the knee replacement area, mostly due to competition from Zimmer Biomet (NYSE: ZBH) and its Rosa robotic surgery platform, as well as from the ATTUNE Total Knee System from Johnson & Johnson (NYSE: JNJ). J&J also plans to take steps toward being more competitive in the spine and trauma areas.

And as if that's not enough, Stryker will face additional challenges on the spine robotics front from Medtronic (NYSE: MDT) and its Mazor platform. But Stryker has no intention to shy away from competition, and according to Chairman and CEO, Kevin Lobo, "the introduction of competitive systems has not slowed down our Mako momentum whatsoever. Surgeons absolutely love our system and are using it at very, very high rates."

More room to swim

In the case of Stryker's Mako, the robotic surgical platform is here to stay and thrive. According to Preston Wells, Stryker's vice president of investor relations, Stryker sold and placed 100 robots during 2020. Mako's installation base grew by 33%. And during the fourth quarter of 2020, about 44% of all total knee replacement procedures for Stryker were performed with the Mako robot.

Even if you already missed the turnaround that occurred in the second half of 2020, it's good to remember that the decline at the end of Q4 will most likely be short-lived. The global medical devices market is growing at a rate of 5.4% per year and is expected to reach upwards of $600 billion by 2025. The slight miss on Q4 revenues is not of deep concern when you consider the number still beat on a year over year basis with growth of 3.2%.

What is a bit of a concern is that analyst ratings are holding steady at overweight, with one additional sell rating from three months ago to one month ago; estimates for Q1 earnings has dipped by $0.04 in the same time frame; and the stock price is already sitting at the average 12 month price target of $253. But the waves are expected to settle during Q2 with an estimated 8% earnings growth year over year. If you're thinking near term, perhaps you wait a bit to see how well the world recovers from what seems like an endless pandemic concern, but if you're following a three to five-year investment plan, this timeframe sits squarely in your wheelhouse, and Stryker is definitely worth keeping on your radar.

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Jeff Little has no position in any of the stocks listed. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.


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