Stryker shared long-term financial goals at its investor day on Wednesday. The company expects to outpace the market in revenue growth and return to pre-pandemic margins by 2025.
Here are four takeaways from the call:
1. Stryker expects to get to pre-pandemic margins by 2025
The company expects to return to 2019 operating margins of 26% in the next two years. CFO Glenn Boehnlein told investors that Stryker expects to achieve this as the operating environment stabilizes.
Improvements in the supply chain mean the company no longer uses spot buys of products and can use cheaper methods for shipping such as freight. Stryker has also been having more pricing conversations with customers and is trying to leverage its growth for supplier discounts. It opened manufacturing sites in Tijuana, Mexico, and Poland, which Boehnlein said cost less than other facilities.
“Assuming [Stryker] can deliver on this (we're skeptical given the potential for dilution from M&A), its 2024-2025 EPS could be well above the current consensus estimates,” Needham analyst Mike Matson wrote in a research note.
Stryker also expects to grow faster than the markets it competes in, though executives declined to share specific growth numbers. CEO Kevin Lobo said the company expects growth to be about 200 to 300 basis points faster than the market.
“We're assuming a stable environment with, let's call it, very modest deal dilution,” Lobo said, adding that the company would tell investors if a specific acquisition changes its outlook.
Stryker’s expectations of double-digit growth for earnings per share and free cash flow conversion in the 70% to 80% range were little changed, Stifel analyst Rick Wise wrote in a note to clients.
2. The company plans more M&A as it pays off its Vocera acquisition
Boehnlein said Stryker is still going to prioritize M&A as its No. 1 use of capital, adding that it hasn’t done share repurchases since 2019. The company expects to have paid down the term loan it used for its nearly $3 billion acquisition of Vocera by the end of the year, the CFO added.
“Everything will be on the table now that we're getting our debt-equity ratio to a very healthy level,” Lobo said.
He expects the majority of Stryker’s deals will be smaller in size.
“We're not against doing larger deals,” Lobo said. “I don't feel any pressure that I have to do something of size, given that we're driving pretty good growth without doing anything of size.”
3. Weight loss drugs are unlikely to slow joint replacements
Stryker brought in David Mayman, chief of adult reconstruction and joint replacement for the Hospital for Special Surgery (HSS), to answer investors’ questions about weight loss drugs and clinical practice. The growth in popularity of the medications has led to concern across the medtech sector.
Mayman expects that while weight loss could decrease patients’ pain, it’s not likely to decrease the number of people seeking joint replacements.
“What we haven't seen is people saying, ‘Oh, well I've lost 20 pounds, and I can play tennis again,’ or ‘I've lost 20 pounds and I can chase after my kid and play basketball with them again,’” he said.
Mayman also said patients’ expectations for joint replacements have changed. When he started practice 19 years ago, the goal was for patients to be able to walk around the block and sleep comfortably. Now, he has patients who are playing pickleball, tennis and golf, and in some cases running marathons.
Some companies have hypothesized that obesity drugs could also lead to more surgeries as more patients become candidates. Mayman said it’s difficult to quantify that benefit because patients who are denied surgery because of weight or other factors are told that by another clinician before they even arrive at his practice.
4. Procedure backlogs remain a factor
A lingering question for the orthopedics space is how much of a backlog will remain after elective procedure volumes dropped over the past three years due to the COVID-19 pandemic.
Mayman said the backlog is improving, but it’s “definitely still out there.” Hospitals are working through a staffing crisis, including the HSS, where Mayman practices.
“We, as of three weeks ago, are fully staffed in terms of OR nursing now, and it's been two years since we've been fully staffed in terms of OR nursing,” Mayman said.
That’s helped with the backlog, but the volume of joint replacements continues to grow, he added.