The medical equipment and supplies sub-sector of health care has come under significant pressure in the last 9 months or so. Big names such as Stryker Corp. (SYK), Zimmer Holdings Inc. (ZMH), and Medtronic Inc. (MDT) are trading at levels we have not seen in years. The whole aura of health care being "recession resistant” or "recession proof” is now thrown away and is an old folktale. Although these economic times are pretty much unprecedented, one thing is for certain: there has really been no safe place to hide in health care, except maybe to the likes of generic drug manufacturers such as Teva Pharmaceutical Industries (TEVA) or Mylan Inc. (MYL).
The depressed Medical Equipment and Supplies industry has faced many headwinds recently. The recession has directly caused a general slowdown in elective procedures coupled with ongoing reductions in hospital capital expenditures. The Department of Justice in the last year has brought many lawsuits to the companies mentioned above and the FDA has increased inspections of manufacturing facilities because of safety concerns. Similarly, another headwind they face is the increasing value of the dollar. The bottom lines of these companies have been adversely affected since a large portion of the industry derives revenues outside of the United States.
When the market does rebound, you should position your portfolio properly to capture the upside, but you must be proactive in doing so. I feel that Stryker Corp. is the best holding within this space to capture this aforementioned upside. In order for a company to be well positioned for an economic recovery and even to weather the current market turbulence, it must have a strong balance sheet since "cash is king" in the current credit environments. Stryker is known year after year for having one of the better balance sheets in the industry. Currently, its total cash and marketable securities stand at $2.2 billion with no total debt . In addition, let’s not forget to mention that free cash flow was up 51% from $160.0 million to $242.0 million in the most recent quarter.
Stryker, once known for consistent double digit growth, operates in two segments: Orthopaedic Implants and MedSurg Equipment. The Orthopaedic Implants segment represented 61% of sales in the last quarter while the MedSurg Equipment segment totaled 39% of total sales. Within the Ortho Segment, Stryker is well known for its well constructed hip, knee, and spine business. These segments have caused headaches for the long-term Stryker investor last year due to the elective nature of these procedures. On the flip side of the business, 60% of sales within the MedSurg segment come from capital equipment, which obviously is seeing a slowdown from decreasing hospital expenditures.
These two issues are ripe for the picking once we see a recovery, since hospitals will start to increase capital spending once admissions pick up. When we see a stabilization or a slight decrease in unemployment, the consumer will be able to get enough insurance coverage to help pay for these elective procedures that they have put off. With a strong balance sheet, successful business model, and effective management, Stryker Corp. is where your money should be when the economy recovers.
- Ryan Savitz
Disclosure: The fund the author manages is long TEVA.
