We think that Stryker Company is currently a better bet compared to Conmed Corporation. CNMD shares trade at 4x rolling earnings, lower than SYK, whose P/S multiple stands at 6.1x. Does this gap in corporate valuations make sense? We believe so and we only expect this gap to widen. Although the two companies have not been significantly hampered by the pandemic, Stryker has seen faster sales growth over the past five years than Conmed. Although Conmed and Stryker are both medical technology companies, Stryker saw its revenue grow from $11.3 billion in fiscal year 2016 to $16.7 billion on an LTM basis. At the same time, Conmed saw sales grow from $0.8 billion in fiscal year 2016 to $1 billion on an LTM basis, a slower pace than Stryker’s sales growth. For more details on Stryker’s earnings and peer comparison, see Stryker Revenue Comparison.
That said, we dig deeper into the comparison, which makes Stryker a better bet than Conmed, especially at these valuations. Let’s step back to examine the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating profit growth and financial condition, combined with expected returns. Our Dashboard Conmed vs. Stryker: Industry competitors, but Stryker is a better bet has more details on this. Parts of the analysis are summarized below.
1. Stryker ahead of revenue growth
Stryker has seen much faster revenue growth over the years compared to Conmed. Stryker’s sales fell from $11.3 billion in fiscal year 2016 to $16.7 billion on an LTM basis, while Conmed saw slower growth during this period, with sales from $800 million in fiscal year 2016 to $1 billion currently.
Additionally, Stryker’s pre-Covid annual sales growth is nearly 10%, higher than Conmed’s 7.8%, while growth during Covid is also higher at -3.6%, compared to -9, 7% for Conmed.
Additionally, a review of recent trends reveals that Stryker posted 11.3% year-over-year sales growth for its latest quarter (Q3 21), compared to 4.6% for Conmed.
Finally, the growth of sales for the last three years for Stryker amounts to 5%, much more than the 3.1% of Conmed.
2. EBIT margins and financial situation: mixed
Styker’s P/EBIT ratio is currently around 40.2x, slightly lower than Conmed’s 41.7x. However, Stryker’s LTM EBIT margins currently stand at 15.1%, higher than Conmed’s 9.7%, but Conmed is ahead in LTM margin change over the past three years, with growth of 2.6% against -2.4% for Stryker.
Stryker’s debt as a % of equity currently stands at 12.7%, below Conmed’s 17.7%. Additionally, Stryker also leads in cash as a % of assets at 7.7%, higher than Conmed’s 1.8%.
For more details on Conmed’s historical returns and comparison with its peers, see Conmed share yield.
3. Finally, Stryker is ahead in terms of expected returns
Using P/S as a baseline, due to the large swings in P/E and P/EBIT, we believe Stryker is currently the best choice. Stryker’s LTM revenue of $17 billion is expected to grow at a CAGR of approximately 7.2% by our estimates, bringing three-year revenue figures to $21 billion. Assuming Stryker’s P/S ratio drops slightly to 5.7x, that means the market capitalization would rise to $117 billion, up more than 15% over three years.
By comparison, based on historical trends, we expect Conmed sales to grow more slowly at a CAGR of 5.8%, bringing revenue in three years to $1.2 billion. However, if we also consider that Conmed’s P/S returns to an average level of 3.6x, we estimate that the market capitalization will only increase by 6% to $4.2 billion over this period.
The fillet of everything
While Stryker’s sales are at a much higher level than Conmed’s, the former has also seen faster revenue growth over the years and also has higher margins than Conmed. That said, our post-Covid recovery comparison above shows that Stryker has recently seen stronger sales growth than Conmed. For this reason, we believe Stryker deserves its higher P/S multiple, and expect the gap in valuations for these companies to only widen. As such, we believe Stryker stock is currently a better bet over Conmed stock.
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