Stryker Corp.

Debt-Fueled Acquisition Roll-Up Is Hitting A Wall And No Longer Producing An Attractive ROIC:

  • Stryker’s shareholders have enjoyed an impressive ride since the start of 2009, with shares up ~546%, not including reinvested dividends. At this time, Stryker had just $18 million of debt, and a surplus of nearly $3.0 billion in cash. As a $17 billion enterprise value  company at the time, valuations were cheap following the financial crisis, deal targets plentiful, and debt capacity abundant
  • However, now the story has changed. As a $118 billion company with $16.4 billion of debt and just $1.5 billion of unrestricted cash, financial flexibility is lower, actionable targets of size to grow Stryker are fewer, and Stryker’s track record of paying rich premiums for targets is working against it. With leverage nearly 5x Total Debt to EBITDA, Stryker must cease more acquisitions and forgo increasing its dividend or repurchasing stock (to offset dilution) in favor of deleveraging
  • We believe Stryker left investors flat-footed when the pandemic hit by not warning investors that its true exposure to elective procedures was 50% of sales. Things got so bad for Stryker, that we find evidence it went delinquent on paying property taxes at its global headquarters. We believe Omicron and global world war fears have delayed Stryker’s recovery
  • Our research shows that Stryker has long suffered from inventory management issues, and has never made good on promises to rationalize its operational and global manufacturing footprint. Furthermore, its promise to complete a critical ERP project to unify over 40 systems failed miserably, was impaired, and has been a sunk cost to investors for over $500 million
  • We believe that during COVID-19, Stryker worked down excess inventory, but has now been caught short critical materials that are being hampered by supply chain challenges and inflationary pressures. Unfortunately, Stryker’s products are largely deflationary and have been declining low single digits per annum. Even Stryker’s one portfolio bright spot, robotic surgeries led by Mako, are now experiencing double digit pricing pressures
  • Based on our behavioral analysis of Stryker management, we believe it often delays bad news as long as possible. Stryker is sending mixed signals to the market about the extent of supply chain and inflation challenges, while trying to recruit new analysts such as Evercore and BofA to say “Buy” its stock
  • 75% of sell-side analysts have “Buy” or “Market Outperform” recommendations, but the average price target is $282 per share. At the current price, this implies just 5% upside. In light of our concerns about the accuracy of Stryker’s financial reporting, and tactics it’s using to embellish results, we believe holding shares at this level represent a poor risk / reward
  • Sell-side analysts expect 110 basis points of gross margin expansion and nearly 6% and 21% cash flow growth in 2022-23. However, Stryker has shown an incredibly poor track-record of delivering on gross margin expectations, never-mind in a world with rampant supply chain dysfunction and inflation pressures. We expect deferred capex spending in recent years to pressure free cash flow going forward.  We believe revenue targets are at risk as analysts fail to capture pricing pressure at Mako Surgical
  • Our estimates ignore what we view are egregious non-cash add-backs for roll-up and integration costs, product recall costs related to management blunders, and dubious inventory step-up add backs which we point out don’t make sense. On our 2022E figures, Stryker trades at an industry leading 6.5x, 35x, and 43x 2022E sales, EBITDA and operating cash flow. Valuing Stryker at multiples closer to the industry average, we see 35% – 75% downside risk to $67.00 – $174.50 per share