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Stryker Corp. (SYK:NYSE) 2Q:04 Earnings Increase by 42%which Beats the Street by $0.03 BY JOHN CHOPACK, JULY 19, 2004

SYK reported earnings totaled $152.7 million or $0.37 per diluted share during the 2Q:04. This 42% increase over the 2Q:03 beat analyst expectations by $0.03. It also triggered several analyst downgrades including First Albany, Wells Fargo and Bank of America. As unbelievable as this sounds, it's true.

Although earnings were strong, revenues totaled $1.04 billion during the 2Q:04, which were $20 million less than analysts expected. We attribute this gap primarily to less of a beneficial foreign currency effect during the 2Q:04 which only contributed 3% of the 17% growth in revenues, compared to a contribution of 5% of the 22% growth by foreign currency during the 1Q:04. We, along with industry analysts and managements, believe that beneficial foreign currency effects will disappear by year-end. However, foreign currency effect is a macroeconomic factor having no bearing on the fundamentals of the orthopedic market.

The decrease in international and domestic pricing that Stryker reported during the 2Q:04 is more concerning. The Company reported that U.S. pricing increased by 3% and Worldwide pricing increased by 2% which compares to a 5% increase and 3% increase during 2003, respectively. Pricing in Japan decreased by 5% during the quarter, following the reduction in Japanese reimbursement payments.

Stryker's 2Q:04 revenues grew by 17% over the 2Q:03. Pricing contributed 2% of the 17% growth; unit volume and product mix contributed 12%; and foreign currency contributed the remaining 3%. Orthopedic implants increased by 12% during the quarter and were hurt by meager sales growth outside the U.S., which increased by only 2%. A conversion in international distributors to a direct sales force was primarily to blame for the weakness in sales outside the US. Management indicated that this was likely to continue for the next couple of quarters.

Sales of knee products increased by 18% during the 2Q:04 and helped to negate the weak hip and international spine sales. Hip sales were weaker than expected, increasing by only 9% during the quarter and only 2% outside the US. Trident ceramic-on-ceramic sales led the 14% increase in domestic hip sales and now represent 32% of all of SYK's acetabular liners sold. Spine sales increase by 20% in US, but only 1% outside the US.

Management indicated that the weakness in revenues during the 2Q:04 was specific to Stryker and not a result of a shift in industry dynamics. However, all orthopedic companies are likely to be negatively impacted by pricing pressure in Japan and less contribution of foreign currency translation as the dollar strengthens.

Stryker is now effectively debt-free from its Howmedica acquisition. John Brown was eager to point out that the Company is primed for some acquisitions during the 2H:04. When questioned regarding the size of these potential transactions, management commented it had the resources to do a Howmedica sized acquisition but this was highly unlikely. Instead, the Company has identified several potential acquisitions in the $100-200 million range. We still would not be shocked if either Medtronic or Abbott approach Stryker as a potential acquirer prior to John Brown's retirement at the end of year.

Management reiterated its guidance for 2004 revenues to total $4.3 billion and increased its earnings outlook from $1.40 to $1.42 which represents a 28% increase over 2003.