|
|
Many highflying tech companies known for hot growth have fallen on hard times. In the meantime, the medical-equipment sector has emerged as a stock market darling. Two of the best-performing companies in this subsector are Biomet Inc. (BMET
) and Stryker Corp. (SYK
), which make orthopedic products.
These unglamorous manufacturers of hip, knee, and shoulder replacements have been looking pretty sexy to investors as an aging population promises to drive double-digit growth for years to come. An economic downturn doesn't stop people with deteriorating joints from getting artificial ones. That has meant solid growth of 15% or better a year, while other sectors better known for high growth continue to underperform.
Biomet sales increased by 16%, to $354 million, and net income by 18%, to $72.6 million, in its fiscal third quarter ended Feb. 28. Stryker's sales grew 17%, to $829.2 million, and net income rose 39%, to $106.1 million, in its fourth quarter ended Dec. 31. That helped put Stryker on 2003's BW50 list of top performers at No. 25, while Biomet merited a No. 32 ranking.
GREATER EXPECTATIONS? Investors' pleasure with those results is already reflected in the companies' stock prices. Lately, shares in both have traded closer to 12-month highs than to their lows, and valuations are rich. Warsaw-(Ind.) based Biomet, which trades at a price-earnings ratio of 23.8 times 2004 earnings and at a price of around $30, hit a 52-week high of $33 on Mar. 17. On the same day, Stryker, based in Kalamazoo, Mich., hit a 52-week high of $70. Stryker now trades around $68, or 26.8 times 2004 consensus earnings per share.
Powerful demographic forces favor the orthopedics market, which should make the stocks long-term holdings to consider. These major orthopedic-product companies -- along with close competitors Zimmer (ZMH
) and Johnson & Johnson's (JNJ
) DePuy division -- stand to benefit as baby boomers grow old. According to the U.S. Census Bureau, 119.5 million Americans will be in the over-45 age group by 2010.
"Older people today expect a more vibrant lifestyle," says analyst Damon Ficklin at independent research firm Morningstar. "That spurs demand as well." (Ficklin doesn't own shares in either Biomet or Stryker.)
"BACK ON THEIR FEET." Better yet, the industry has been able to raise prices on knee and hip replacements by 90% over the past decade, figures Michael Dauchot, lead health-care portfolio manager for asset-management firm Dresdner RCM. Though analysts aren't expecting high single-digit annual price increases to continue, demand should hold up, and pricing should still rise a few percentage points a year.
"What we do is put people back on their feet, so the pricing environment should stay strong," says Biomet CEO Dane Miller. He figures unit prices can rise around 3% to 5% a year. Not bad in an environment in which most manufacturers are facing deflationary pressures.
The orthopedics field isn't about groundbreaking technologies. Rather, making slight enhancements on existing products and maintaining loyalty among surgeons are crucial. New products by both Stryker and Biomet will continue to focus on minimally invasive surgery. "Lifestyles are demanding better results, less pain, and quick recovery," Ficklin says. In the realm of hips and knees, they continue to improve on product materials and joint maneuverability. The latest metal-on-metal or ceramic-on-ceramic products are stronger and longer-lasting compared to older plastic and metal versions.
SPINAL-TAPPED. Investors can expect some volatility in the near term. Take the reaction to Biomet's fiscal third-quarter earnings report released on Mar. 19. The company matched earnings expectations, but revenue growth in one of its businesses wasn't as robust as hoped for. The stock lost 4% by the close of trading "Even a slight downtick is enough to get people a little jittery," says Kate Sharadin, analyst at Gerard Klauer Mattison. She rates Biomet and Stryker neutral. (She doesn't own shares personally, and the firm has no investment-banking ties with either company.)
The disappointment was Biomet's 10% growth, to $36.1 million, in sales of spinal-surgery products. Investors want to see more growth in that sector since the market for products that treat the degeneration of spinal disks is growing at 20% annually. While Biomet had been delivering growth in line with the market for the past year, some fear that it's starting to lose share on a key product due to competition from a new bone-growth product from medical-device giant Medtronic (MDT
).
Miller admits that Medtronic's new product was a factor, but so were lack of sales personnel and an incomplete offering of spinal products -- both of which he says are being addressed.
PREMIUM-WORTHY? A recent increase in guidance from competitor Zimmer is also raising questions about what's going on in this industry. Zimmer promised sales growth for the current quarter of 20% or more over the same period in 2002. "We assume they're taking some share from everyone," says Sharidan. Miller, however, isn't worried. "I don't think [they're gaining share] any more than in the past. Other companies like us have taken share from Zimmer," he says.
Stryker, which declined to comment for this article, has said it expects gross margins to improve as it moves manufacturing plants to Ireland and Puerto Rico by yearend. It has said 2003 revenues will grow by 15% over the year, to $3.5 billion, and earnings per share will grow by 20%, to $2.10. "Stryker has a longer history of executing 20% earnings growth. It deserves a premium for that," says Dresdner's Dauchot. (Dresdner owns shares of both companies in its funds.)
If the economy improves after the war with Iraq ends, BioMet's and Stryker's stock prices could suffer as investors look elsewhere for rebound plays. "People are willing to pay a premium for their growth now," but that could change when more cyclical businesses make a comeback, says John Mera, President of St. Louis-based Argent Capital Management, a sub-adviser to the Lindner Growth and Income Fund. (Lindner doesn't own shares of either company.)
Still, a huge number of Americans will soon reach the age when brittle or inflamed joints inhibit a pain-free life. That suggests the orthopedics industry should keep growing robustly. And that should mean Biomet and Stryker will be reliable long-term performers.
MARCH 24, 2003 |
Copyright 2003, Bloomberg L.P.
Printer-Friendly Version