Wednesday, November 15, 2006

Calls of Note Part 2

- The Merrill Lynch Focus 1 Committee is adding Stryker (NYSE:SYK) to its list, which is
consistent with their view that SYK offers above average revenue and earnings growth over the near and long term. Firm remains upbeat regarding key trends in the reconstructive (hip and knee implants) market, including demographics and pricing, which are likely to have a significant impact on SYK's valuation.

They look for 11-12% sales gains in 2007-2009, well above the 7-8% growth forecast for the overall med tech sector. Stryker's long held target of 20%+ earnings growth appears achievable over the next couple of years (slowing to an estimated 17% in 2009) with leverage fueled by a favorable mix shift that should lift gross margin, SG&A leverage, increasing cash balances and a lower tax rate.

They rate both Zimmer and Stryker a Buy with 12-month price objectives of $80 and $60, respectively. ZMH has been the biggest out-performer of late, offering EPS upside to consensus estimates. But SYK should benefit from more robust earnings growth over the next couple of years (20% vs 15% for ZMH) and greater upside to firm's PO, hence the decision to add it to Merrill Lynch's Focus 1 list.

Notablecalls: Expect to see buy interest in SYK but note that it's difficult for me to see more than 1 pt worth of upside from current levels.

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