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General Electric Company (GE), Stryker Corporation (SYK): Why Aren’t Investors Worried?

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When a company misses top and bottom line expectations and lowers its outlook, its stock usually plunges. However, medical device manufacturer Stryker Corporation (NYSE:SYK) appears to be immune to such concerns, and its stock has been flirting with 5-year highs daily despite reporting disappointing second quarter earnings that were plagued by a big product recall. Why are investors so optimistic regarding Stryker’s future growth prospects? Let’s take a closer look and find out.

A sour second quarter

Stryker CorporationFor the second quarter, the company earned $0.56 per share, or $213 million, a 34.5% decline from the prior year quarter. Revenue rose 5% to $2.21 billion. Stryker Corporation (NYSE:SYK) also reduced its full-year earnings outlook, and now expects to report earnings between $4.20 and $4.26, down from its prior guidance of $4.25 to $4.40. Full year sales are expected to rise 4.0% to 5.5%.

Most of its bottom line decline was attributed to its hip implant recall, which cost Stryker Corporation (NYSE:SYK) $170 million during the quarter.

A costly recall

A year ago, Stryker Corporation (NYSE:SYK) recalled its Rejuvenate Modular and ABG II Modular-Neck Hip Stems, after the company discovered that the metal parts of the two products could corrode and spread tiny metallic shards into a patient’s bloodstream. Several patients suffered tissue and bone death along with device failure at the implant site, which caused waves of lawsuits over the past year.

Despite this legal trouble, Stryker Corporation (NYSE:SYK)’s Reconstructive business segment, which produces hip, knee, foot and ankle implants, reported a 5.6% increase in revenue to $979 million, accounting for 44.3% of the company’s top line. Sales of hip implants rose 6% both domestically and internationally, a notably lower rate than sales of its knee, foot and ankle implants, which all rose at double digit rates.

Other segments continue growing

Stryker’s other businesses posted healthy growth during the quarter. Its MedSurg business, which produces surgical tools such as the 1488 camera and System 7 power tools, reported a 4.2% rise in revenue to $819 million (37% of sales), exhibiting stronger growth overseas. However, the MedSurg division was also weighed down by the recall of its Neptune waste management system last September, which the FDA claims was sold without agency clearance, eventually causing the death of a patient when a chest drainage tube failed after surgery.

Stryker’s third largest business, its Neurotechnology and Spine segment, is its fastest growing one, reporting 5.4% year-over-year revenue growth to $414 million. Sales of Neurotechnology devices surged 9.6% domestically and 3.5% internationally, and spinal implant sales also climbed 2.7% domestically and 11% internationally. The division’s global growth was aided by its acquisition of Trauson, the largest trauma device manufacturer in China and a major competitor in the spinal implant segment.

A look at Stryker’s industry peers

In my opinion, Stryker shareholders consider the hip and waste management system recalls to be isolated, unfortunate events. Moreover, Stryker still managed to report strong growth across all of its segments in spite of these problems, which means that its bottom line could increase substantially once these troubles are behind it.

Investors haven’t been as kind to other medical device manufacturers, however.

Medical device manufacturer ICU Medical, Incorporated (NASDAQ:ICUI), best known for its IV infusion devices, catheter tubes, and protective oncology gear for caregivers, recently fell after the company reported bleak second quarter earnings that missed analyst estimates.

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