Stryker Corp

Stryker delivered second-quarter results that included organic revenue growth of 9% year over year and reported sales growth of 9.5% compared with first-quarter revenue, muted by a random cyberattack. Management narrowed its outlook at the top and bottom of its range.

Why it matters: We're pleased to see so many product categories return to double-digit growth in the quarter, including endoscopy, medical, and trauma and extremities. This reassures us that Stryker has been able to rectify much of the earlier cyber disruption. The firm now faces two lingering challenges. First, the company must ramp up manufacturing to tackle the outstanding orders that were delayed in the first quarter. With most manufacturing back online in early April, we think it's likely Stryker, one of the best med tech operators in our view, can catch up. Second, there has been unspecified disruption to the primary legacy Inari Medical manufacturing facility. Though addressing this situation could take longer, we remain enthusiastic about the mechanical peripheral thrombectomy market prospects.

The bottom line: As our minor adjustments to our model weren't material, we're reiterating our fair value estimate of $316 per share and Stryker's wide economic moat. Shares appear fairly valued, in our view. Our projections for the full year remain bounded by management's newly narrowed outlook. However, the market may be disappointed that management pulled back on the upper end of its guidance, as shares fell 8% in after-market trading.

Coming up: We're not particularly concerned that US knees rose 6%, trailing the 12% growth in international knees because we think the full commercial launch of the handheld Mako RPS through the second half of 2026 should bolster US knees. Stryker is putting emphasis on swaying competitive surgeons toward Mako RPS, especially in the ambulatory surgical, or ASC, setting. We think this puts Stryker in a strong position to infiltrate ASCs.

We're holding steady on our fair value estimate of $316 per share. We have baked in relatively optimistic estimates for 2026 as the firm recovers from the soft first quarter hindered by the random cyberattack that scrambled orders and manufacturing. Anticipated recovery in the Inari business and launches of Mako RPS and the Triathlon Gold knee, along with strength in Mako shoulders should also support robust top-line growth this year, though we remain cautious about how cuts to Medicaid and loss of insureds on the exchanges could shift demand in 2027 and 2028. If the increased fuel and food costs continue to drive consumers to tighten their belts, we could see weakening medical utilization this year. We project annual average top-line growth of 8% through 2030, with Stryker outpacing the general medtech market, and operating margin to reach 23% over the same period.

Over the longer term, we expect product mix shifts toward more consumables and Wright Medical and Vocera to improve operating margin. We continue to hold robust expectations for growth in knees and hips, the Mako robot, trauma and extremities, medical products, and neuro- and peripheral vascular. Importantly, Stryker still benefits from the head start it enjoyed in placing its Mako robots; we think it could take some time for Zimmer Biomet and Johnson & Johnson to catch up to Stryker's installed base.

Stryker enjoys a wide economic moat thanks to its competitive advantages across its key businesses. We think the orthopedic segment remains Stryker's moatiest division because of significant switching costs for surgeons, who are still influential decision-makers for implant brand choice. Because the extensive tools used to prepare bones and install implants are not standardized and differ by company, there is a long learning curve to become proficient in using a company's instrumentation. And, once proficient, surgeons aim to maintain that level of mastery through practice. Moreover, relative to other specialists, an orthopedic surgeon's skill and experience can play an outsize role in the clinical outcome for the patient. These factors leave surgeons reluctant to train and master multiple instrumentation systems, especially if procedure volume is too low to maintain high surgical facility with more than one system.

Surgeons' preferences for certain vendors can stretch back to their days in residency training. Research has found that surgeons stick with their preferred vendors and sales reps beyond 15 years and use that vendor for approximately 95% of their orthopedic procedures during that time. Switching to another instrumentation system would require taking time out for training, developing a relationship with a new sales rep, and working less efficiently during the early period of mastering another vendor's tools, possibly raising clinical risks for the patient and reducing the number of procedures (and income for the surgeon). This dynamic explains why market share among the four top orthopedic implant makers has remained remarkably steady. Over the last decade, Stryker's market share in knee implants has hovered around 22%, and Zimmer Biomet and DePuy have held share at 30% and 19%, respectively, by our estimates. The most common avenue to significant and durable share gain has been through acquisition.

The relationship between Stryker sales rep and surgeon is an intangible asset that contributes to maintaining the firm's competitive advantage. More so than with any other medical device or equipment, orthopedic sales reps play a critical role for the surgeons. The sales rep is present for every procedure, can show the surgeon how to use new features in the toolkit, and prepares selection of instrumentation in all the right sizes and sequence for the procedure. For most orthopedic surgeons, who may perform 30-40 hip replacements and 60-70 knee replacements in a year, sales reps provide a valuable service. For the small group of high-volume surgeons, who may be performing five knee replacements in a day, there is less need for any training by the sales rep, and the surgeon may wish to hire a nurse who can handle the procedure preparation. However, these high-volume surgeons remain a minority.

While Stryker's other businesses are not quite as moaty as orthopedics, the firm does enjoy long-term advantages there too. In particular, Stryker's intellectual property keeps new entrants out and competitors at bay. The firm owns roughly 5,800 patents around the globe and acts assertively to enforce them. Within the current patent law framework that favors the first inventor to file, larger competitors such as Stryker have benefited. This legal approach rewards those companies that file in the most timely manner, with the most comprehensive understanding of the future application of such technology, and those with deep pockets to oppose newly granted patents to rivals.

Firms like Stryker, which can support a large legal team, are in a stronger position to take advantage of this framework. Conversely, the law erects hurdles that keep emerging upstart firms from becoming serious threats to Stryker and its peers.

In terms of environmental, social, and governance issues, we think product governance and quality risk are the most worrisome. We agree that there is a modest level of ongoing exposure to defective products and associated legal settlements can be somewhat material, but we have yet to see any recall or product defects permanently impair Stryker's competitive advantage or return on invested capital.

For example, Stryker's recall of its metal-on-metal hips remains the firm's largest-scale recall and cost an estimated $1.7 billion in expenses spread over several years to provide medical care and settle with patients. First, the cost of this debacle barely put a dent in Stryker's returns on invested capital, which remained more than 3 times the weighted average cost of capital during that period. Second, that episode did nothing to turn orthopedic surgeons away from Stryker's other products. As the recall unfolded, Stryker saw a low-single-digit decline in its hip revenue for one single year. In other years since 2012, the firm has maintained positive growth that, over the long term, has generally matched the hip market. We think this historical instance underscores the strength of the switching costs that support Stryker's wide economic moat. Surgeons trained on Stryker instrumentation are extremely reluctant to switch. Additionally, the product cycles are fast enough that Stryker can make relatively easy adjustments to the product or simply pivot to a previous generation of technology that has already been proved on the quality front.

Stryker made the most of its three-year head start in placing its Mako robots in hospitals, leaving Zimmer Biomet and Johnson & Johnson to play catch-up.

As hospitals and healthcare systems aim to consolidate suppliers, Stryker should benefit because those customers are more likely to stick with the most widely used brands to accommodate more of their surgeons.

Considering how resistant orthopedic surgeons are to hospital efforts to restrict brand choice and the slow transition to hospital employment, we think surgeon influence will wane slowly.

Zimmer Biomet's progress with its Rosa robot could put a crimp in Stryker's robust growth in knees on its Mako robot.

Considering Stryker's use of M&A to acquire innovation, the firm runs the risk of overpaying for acquisitions.

In the race to penetrate ambulatory surgical centers with large joint procedures, Stryker faces stiff competition from Smith & Nephew and Zimmer Biomet.