Stryker's Physio Deal A 'Head Scratcher' For This Analyst

The latest Stryker Corporation SYK deal to buy Physio-Control International, Inc. for $1.28 billion cash is a bit of "head scratcher" for Piper Jaffray analyst Matt O'Brien.

Physio-Control, which is owned by Bain Capital Private Equity, makes monitors/defibrillators, automated external defibrillators (AEDs) and CPR-assist devices. The company was spun off from Medtronic and sold to Bain capital for $487 million in 2011.

Styker said Physio's portfolio is highly complementary to Stryker Medical's EMS (Emergency Medical Services) offering and will drive a greater balance between capital and disposables. Physio-Control sales for fiscal 2015 grew 6 percent in constant currency to $503 million.

Stryker also revised its adjusted 2016 EPS view reflecting the Physio-Control acquisition and the previously announced transactions. It now sees earnings of $5.57 to $5.77 a share, up from $5.55 to $5.75 a share it estimated when it bought medical supplies maker Sage Products LLC two weeks ago. The Street expects earnings of $5.60 a share.

For 2017, Stryker expects the acquisition of Sage and Physio-Control combined will be accretive by 15 – 18 cents a share. The analyst projects the Physio deal to add 3 cents to earnings in 2016 and 7 cents in 2017.

A Bit Skeptical

"Although the assets should fit nicely into SYK's Medical business and is expected to deliver mid-single digit top line growth, we are a bit skeptical longer term given the historical performance of the company," O'Brien wrote in a note to clients.

The analyst said the business has historically struggled with recalls and delivering steady topline growth, which leaves him a bit skeptical on this transaction compared to most of the deals Stryker executes.

However, this transaction, along with recently announced Sage deal, likely signals a shift in SYK's view on the hospital environment going forward which includes fewer facilities being built.

"So, we think this is a proactive move towards more disposable and non-deferrable products within the portfolio," the analyst added.

In 2016, Stryker has done three deals – Sage, Synergetics and Physio – worth $4.2 billion in total. The company has ample cash to do further transactions if strategically fit (and at the right price).

"Taking the current 10-K, adjusted for the ~$3.75B debt the company expects to issue and taking into account the current announced deals, we believe that the company has ample dry powder to do at least $5B in future deals if it wanted to lever up, yet stay within an investment grade rating (could add another $4B in debt in needed). We believe SYK continues to show interest in spine names," O'Brien noted.

O'Brien has an "Overweight" rating and price target of $110 on the stock, which was trading at $96.81.