Stryker Up 13.6% in 3 Months as Recovery Gains Strength, What's Next?

Stryker Corporation SYK shares have risen 13.6% in the past three months, outpacing the Zacks Medical sector’s 12.9% gain and the S&P 500’s 1.7% advance. The move has coincided with a sharper operating recovery after a difficult first quarter.

The investor question is whether improving sales, margins and production can keep supporting the stock, or whether execution demands and a richer relative valuation now make the next leg higher harder to achieve.

Image Source: Zacks Investment Research

Why Stryker’s Three-Month Rally Has Support

Stryker’s second-quarter results gave investors firmer operating evidence. Organic sales increased 9%, while adjusted earnings rose 17.9% to $3.69 per share. Management said the company exited the quarter with regained momentum after the March cybersecurity disruption.

Demand remained broad across the portfolio. MedSurg and Neurotechnology organic sales increased 9.2%, while Orthopaedics rose 8.6%. That breadth matters because the recovery is not resting on one product line or a single procedural category.

Stryker’s Q2 Recovery Reset the Narrative

Capital equipment was a major contributor as production came back online, and Stryker ended the quarter with elevated backlog and strong orders. Mako also posted its best-ever second quarter for installations in both the United States and international markets, with utilization continuing to rise.

The competitive backdrop remains active. Zimmer Biomet Holdings, Inc. ZBH reported 4% organic constant-currency sales growth in its latest quarter and is advancing its ROSA robotic platform. Intuitive Surgical, Inc. ISRG reported 16% growth in combined da Vinci and Ion procedures and placed 468 da Vinci systems, underscoring continued demand for robotic-assisted care.

SYK Still Faces Execution Tests in the Second Half

The recovery is not complete. Management still needs to ramp production fast enough to convert a large capital order book, while U.S. Peripheral Vascular back orders are expected to fall to a manageable level by the end of the third quarter.

Costs remain another watch point. Cyber remediation and stabilization spending will continue through the year, while manufacturing and supply-chain costs were roughly a 100-basis-point first-half gross-margin headwind. Those pressures could affect delivery timing and operating leverage if recovery work takes longer than planned.

Valuation Could Cap Stryker’s Next Leg Higher

After the rally, Stryker trades at 21.6X forward 12-month earnings. That is above the Zacks sub-industry’s 17.5X multiple, suggesting investors are already paying a premium for Stryker’s growth profile and recovery prospects.

The signal is not uniformly expensive, however. SYK remains below its own five-year median of 26X. That leaves valuation in a middle ground: richer than peers, but still below the stock’s longer-term norm.

Image Source: Zacks Investment Research

Wrapping Up

Stryker’s operating case has improved, but the next phase depends on execution. Production recovery, vascular backlog reduction and continued earnings momentum need to hold up against lingering remediation and manufacturing costs.

Currently, Stryker carries a Zacks Rank #3 (Hold). Likewise, Zimmer Biomet and Intuitive Surgical also carry a Zacks Rank of 2. The investment decision is better anchored to valuation, second-half execution and the durability of earnings growth rather than assuming the recent rally will continue.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Research Chief Names "Single Best Pick to Double"

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.

This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research