After 45% Rally Can Stryker Stock See More Gains?

After a 45% rally off the March bottom, Stryker stock (NYSE:SYK), a company best known for its implants used in joint replacement and trauma surgeries, looks fully valued based on its historic P/E multiples. Stryker stock has rallied from $126 to $183 off the recent bottom compared to the S&P which moved around 42%, with resumption of economic activities as lockdowns are gradually lifted. On the way down though, Stryker underperformed with its stock down 44% between February 19 and March 23, compared to a 34% plunge for the S&P500. Stryker stock is also up 21% from levels seen in late 2017.

Stryker stock has partially recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand for its products and revenues will likely be lower than last year given the postponement of elective surgeries in the wake of the Covid-19 pandemic.

Some of this rise of the last 2 years is justified by the roughly 20% growth seen in Stryker’s revenues from 2017 to 2019, which translated into a similar growth in Net Income. While the company has seen steady revenue and earnings growth over recent years, its P/E multiple has also seen a moderate increase. We believe the stock is unlikely to see significant upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 21% Change in Stryker Stock between 2017 and now?‘, has the underlying numbers.

Stryker’s P/E multiple changed from 23x in 2017 to 25x in 2019. While the company’s PE is now 22x, there is limited room for upside when the current PE is compared to levels seen in the past years, PE of 23x at the end of 2017 and 21x as recent as late 2018.

So what’s the likely trigger and can SYK stock stabilize around the current levels?

The global spread of coronavirus has meant lockdowns in various cities, and increased restrictions on the movement of people. With hospitals working at minimum capacity for non-Covid and non-emergency cases, several types of elective surgeries have been postponed. This will likely have a meaningful impact on Stryker’s business as well. Though we believe that most of the surgeries will eventually take place at a future point, it will be challenging for healthcare institutions to manage a huge backlog. For Stryker, its 2020 revenues and earnings are estimated to take a hit, in-line with other medical devices companies.

Additionally, there are other concerns for Stryker to deal with. The company in Nov 2019 announced its plan to acquire Wright Medical Group in a $4 billion deal, and that has now come under the scanner of the UK’s Competition and Markets Authority over competition concerns. This acquisition is important for Stryker, as it will result in the company becoming the largest player in the global small-joint reconstructive implant space, along with closing the gaps in Stryker’s current small-joint replacement portfolio.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

While Stryker stock looks like it has limited room for growth, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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