Credit Suisse
We expect sales growth for Stryker of about 5% in 2011-2016, stemming from a rebound to trend-line growth in the hip and knee markets to about 3% world-wide (hips/knees are 30% of Stryker sales) following recent market softness.
We also expect contribution from Stryker‘s (ticker: SYK) higher-growth segments: Med/Surgery and Spine and Neurotech, which combined are about 55% of Stryker sales and should grow about 6% through 2016. Against a 5% top-line growth backdrop, we assume about 300 basis points of 2011-2016 earnings before interest (EBIT) margin improvement, which, combined with about $400 million in annual share buybacks, drives our about 9% 2011-2016 earnings-per-share growth forecast. Our sales and margin forecasts give us confidence that Stryker can generate about $1.8 billion per year in free cash flow (FCF) through 2016, which we see as a source of upside potential to the extent that Stryker can use merger and acquisitions to enhance its growth profile.
We initiate coverage of Stryker with an Outperform rating and a $63 target price. Given Stryker’s growth profile, we believe that current valuation (13 times and 12 times our 2012-2013 EPS estimates) is attractive. Our $63 discounted-cash-flow (DCF)-based target price implies a price/earnings multiple of 15 on our 2012 EPS estimate (14 times excluding $4 per share in net cash), which represents a discount to Stryker’s five-year average P/E multiple of 17 times on a next-12-month basis. We expect a discount to historical trading levels to persist, given broader economic challenges; however, we believe that modest multiple expansion is plausible, given Stryker’s solid growth trajectory, FCF profile, and diversified business model.
We project Zimmer Holdings‘ (ZMH) sales growth of 4% in 2011-2016 due to a rebound to trend-line growth in the hip and knee markets (71% of Zimmer’s sales). We also assume about 300 basis points of EBIT margin gains, which, combined with about $550 million in share buybacks annually, drives our 10% 2011-2016 EPS growth forecast.
We Initiate Coverage of Zimmer with an Outperform rating and a $72 target price. Given Zimmer’s 10% EPS compounded annualized growth rate (CAGR), we believe that current valuation (12 times and 11 times our 2012-2013 EPS estimates) is attractive. Our $72 discount DCF-based price target implies a multiple of 14 on our 2012 EPS estimate (in line with Zimmer’s five-year next-12-months average P/E multiple of 14 times) and 13 times our 2013 EPS. We think modest multiple expansion is possible, given Zimmer’s steady growth and FCF generation ability.
Moreover, Zimmer’s hip/knee exposure makes the company highly leveraged to a better-than-expected rebound in major joints. We see a one- to two-year bounceback to 5%-plus major-joint market growth as a plausible outcome (given the potential demand build following recent economic-related procedure postponements) and one that could benefit Zimmer’s sales and valuation.
— Bruce Nudell
— Matthew Keeler
— Narendra Nayak
