This medical device company is a better choice than Abbott stocks
We think that Stryker Corp stock. (NYSE:SYK) is currently a better choice compared to its industry counterpart, Abbott stock (NYSE:ABT), despite being the more expensive of the two, trading at 6.1x trailing earnings versus 5.1x for Abbott. Even if we were to look at the P/EBIT ratio, SYK stock seems to be more expensive, with a P/EBIT ratio of 40.6x, compared to 24.4x for ABT stock. Although both companies have seen increased revenue in the recent past, Abbott’s growth has been better, mainly due to its Covid-19 testing.
If we look at stock market returns, Stryker’s
1. Abbott’s revenue growth has been stronger
- Both companies have seen sales growth over the past twelve months. Still, Abbott’s 24% revenue growth is higher than Stryker’s 19%.
- Over a longer period, Abbott’s sales increased at an average growth rate of 12.4% to $43.1 billion in 2021 from $30.6 billion in 2018, while Stryker’s grew 8.4% to $17.1 billion in 2021 from $13.6 billion in 2018.
- Abbott’s sales in recent years have been driven by very strong demand for Covid-19 tests. However, as Covid-19 cases decline, demand for testing is also expected to fall, weighing on Abbott’s diagnostics business in 2022.
- That said, sales of the company’s established medical devices and pharmaceuticals are likely to see steady growth over the next few years.
- Stryker’s revenue growth was driven by new product launches, such as – Surgi-Count+ – a surgical sponge counting system. Last month, it launched Insignia Hip Stem and the Power-PRO 2 ambulance bed. The new launches are expected to help its revenue growth in the future.
- Stryker’s revenue growth was also boosted by the acquisition of Wright Medical, a medical device company, in late 2020. Earlier this year, Stryker agreed to acquire Vocera Communications, a communications systems company for the health sector.
- Our Abbott revenue and Stryker revenue dashboards provide more information about business sales.
- Going forward, Stryker’s revenue is expected to grow faster than Abbott’s over the next three years as Abbott’s diagnostics business declines due to lower demand for Covid tests. -19. The table below summarizes our revenue forecasts for both companies over the next three years. It shows a CAGR of 7.4% for Stryker, compared to a CAGR of 4.5% for Abbott, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for businesses that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenue. For businesses negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery at the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed for the three years preceding Covid to simulate a return to normal conditions. For companies with positive revenue growth during Covid, we consider the average annual growth before Covid with some growth weight during Covid and the last twelve months.
2. Abbott is more profitable and offers less risk
- Abbott’s trailing 12-month operating margin of 24.5% is higher than Stryker’s 19.1%.
- This compares to figures of 16.1% and 18.2% seen in 2019, before the pandemic, respectively.
- Abbott’s free cash flow margin of 24.5% is better than Stryker’s 19.1%.
- Our Abbott operating profit and Stryker operating profit dashboards have more detail.
- In terms of financial risk, Stryker’s 12% debt as a percentage of equity is higher than Abbott’s 8%, while its 9% cash as a percentage of assets is lower than Abbott’s 14%, implies that Abbott has a better debt position and it has more cash cushion.
3. Filet of Everything
- We find that Abbott has demonstrated better revenue growth, is more profitable, has better debt and cash position, and is available at a comparatively lower valuation.
- However, looking at the outlook, using P/S as a base, due to the large swings in both P/E and P/EBIT, we believe Stryker is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Abbott and Stryker over the next three years and indicates an expected return of 15% for Stryker over this period compared to an expected return of 9% for the ABT Stock, Implying Investors Better Buy SYK Over ABT, Based on Trefis Machine Learning Analysis – Abbott vs. Stryker – which also provides more detail on how we arrive at these numbers.
While SYK stock may outperform ABT, the Covid-19 crisis has created many price discontinuities which may provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Medtronic vs. Masco
What if you were looking for a more balanced portfolio instead? Our quality portfolio and multi-strategy portfolio have consistently beaten the market since late 2016.
Invest with Trefis Wallets that beat the market
See everything Trefis Price estimates