Executive Summary

Investment Thesis (3 sentences): Stryker Corporation is a high-quality medical device compounder with a dominant position in orthopedic implants and surgical robotics (Mako platform), benefiting from the irreversible demographic tailwind of global aging. The company demonstrates exceptional execution with consistent 10%+ organic growth, 27%+ operating margins, and a 31-year track record of dividend increases. However, the stock trades at a premium valuation (44x P/E) that prices in near-flawless execution, requiring patience for a more attractive entry point.

Key Metrics Dashboard:

Verdict: WAIT - Exceptional business at premium valuation. Accumulate below $300 (20x forward P/E).

Phase 0: Opportunity Identification (Klarman Framework)

Why Does This Opportunity Exist?

The honest answer: This is NOT a traditional "opportunity" - it's a quality premium.

Stryker trades at premium multiples because:

1. Predictable growth: ~10% organic revenue growth is highly consistent
2. Defensive characteristics: Healthcare is recession-resistant
3. Demographic tailwind: Aging population creates secular demand
4. Superinvestor validation: Terry Smith's 8.6% position signals quality

Why I'm Looking:

• Terry Smith signal prompted investigation
• Medical devices are in my circle of competence
• Aging demographics thesis is compelling
• Company has exceptional execution track record

Mispricing Assessment:

• Not currently mispriced. The stock trades at fair value for a high-quality compounder.
• Opportunity requires patience: Market corrections, healthcare sector rotation, or company-specific stumbles could create entry points.

Phase 1: Risk Analysis (Inversion Thinking)

"How Could This Investment Lose 50%+ Permanently?"

1. Multiple Compression (Most Likely):

   • If P/E compresses from 44x to 22x (historical average), stock falls 50%
   • Could occur if growth slows to 5% or margins contract
   • Probability: 20% over 5-year horizon

2. Technological Disruption:

   • New robotic surgery platforms could obsolete Mako
   • Minimally invasive techniques could reduce need for implants
   • Gene therapy or regenerative medicine could eliminate joint replacement
   • Probability: 5-10% over 10-year horizon

3. Healthcare Policy Risk:

   • Medicare reimbursement cuts for orthopedic procedures
   • Price controls on medical devices
   • Hospital consolidation reducing bargaining power
   • Probability: 15% over 5-year horizon

Bear Case (3-Sentence Summary)

"Stryker trades at 44x earnings for a business that will inevitably face margin pressure from healthcare cost containment, competition from Zimmer Biomet and J&J in robotics, and the cyclicality of hospital capital expenditure budgets. The 10%+ growth rate is unsustainable as the company matures, and any deceleration will trigger severe multiple compression. The $200M annual tariff impact demonstrates vulnerability to trade policy, and the $25B in goodwill represents acquisition risk that hasn't been fully tested in a downturn."

Pre-Defined Sell Triggers

Phase 2: Financial Analysis

Profitability Metrics

Assessment: Margins are stable and improving. The 100bps annual operating margin expansion target demonstrates disciplined execution.

Cash Flow Analysis

Assessment: Excellent cash conversion. FCF exceeds net income, indicating high-quality earnings.

Balance Sheet Strength

Fortress Rating: STRONG - Conservative leverage with ample financial flexibility for M&A.

Valuation Analysis

Current Valuation:

Owner Earnings Calculation:

Net Income (2025)              $3,246M
+ D&A                          $1,193M
- Maintenance CapEx (~50%)       $380M
- Working Capital Increase       $200M
= Owner Earnings               $3,859M

Owner Earnings/Share = $10.10

Conservative Value (10x) = $101
Fair Value (15x) = $152
Premium Value (20x) = $202 (for exceptional moat)
Quality Premium (25x) = $253 (market willing to pay)

Graham Number:

Graham Number = √(22.5 × EPS × BVPS)
             = √(22.5 × $8.39 × $58.61)
             = √$11,056
             = $105

Intrinsic Value Estimate: $280-320 (using blend of DCF and owner earnings with quality premium)

Margin of Safety at Current Price: -15% to -30% (OVERVALUED)

Phase 3: Moat Analysis

Competitive Advantages

Mako Robotic Platform Analysis

• Installed Base: 2,000+ systems globally (growing double-digits)
• Procedures: 2M+ robotic procedures performed (milestone reached Q2 2025)
• Utilization: High and increasing utilization rates
• Applications: Knee, hip, revision hip, spine (launching), shoulder (launching)
• Competitive Position: #1 in orthopedic robotics

Moat Trajectory: WIDENING

• Mako platform is expanding to new applications
• Surgeon training creates sticky relationships
• Data advantage from 2M+ procedures
• Network effects strengthen over time

Forces of Erosion

10-Year Moat Assessment: Moat likely to be WIDER due to data advantage, installed base growth, and continuous innovation.

Phase 4: Management & Incentive Analysis

Leadership

• CEO: Kevin Lobo (since 2012)
• Tenure: 13+ years
• Background: Former J&J executive; deep industry experience
• Insider Ownership: 5.4%

Capital Allocation Track Record

Recent M&A

• Inari Medical (2025): ~$4.9B acquisition for venous thromboembolism products
  • Integration on track
  • Double-digit pro forma growth
  • Strategically sound expansion into vascular

Compensation Analysis

Munger Test: Management incentives are reasonably aligned with shareholders. The 31-year dividend increase streak demonstrates long-term thinking.

Phase 5: Catalyst Analysis

Potential Catalysts

Negative Catalysts

Catalyst Assessment

No immediate catalyst to close valuation gap - the stock is fairly valued for a quality compounder. Value realization depends on:

1. Continued execution (likely but priced in)
2. Market rotation or correction (creates buying opportunity)

Phase 6: Megatrend Resilience

Total Score: +5 | Tier 2 "Resilient"

Phase 7: Psychology Check

Munger Final Test:

• Can I explain this business to a 12-year-old? YES - "They make fake hips and knees and the robots that help doctors install them."
• What do I believe the market doesn't? Nothing - the market correctly values this as a quality compounder.
• If this dropped 50%, would I buy more? YES - absolutely at $185 (22x forward earnings).

Investment Recommendation

┌─────────────────────────────────────────────────────────────────┐
│                     INVESTMENT RECOMMENDATION                    │
├─────────────────────────────────────────────────────────────────┤
│ Company: Stryker Corporation       Ticker: SYK                  │
│ Current Price: $369.56             Date: February 1, 2026       │
├─────────────────────────────────────────────────────────────────┤
│ VALUATION SUMMARY                                                │
│ ┌─────────────────────────┬─────────────┬─────────────────────┐ │
│ │ Method                  │ Value/Share │ vs Current Price    │ │
│ ├─────────────────────────┼─────────────┼─────────────────────┤ │
│ │ Graham Number           │ $105        │ -72% (overvalued)   │ │
│ │ Owner Earnings (10x)    │ $101        │ -73%                │ │
│ │ Owner Earnings (15x)    │ $152        │ -59%                │ │
│ │ Owner Earnings (25x)    │ $253        │ -32%                │ │
│ │ DCF (Conservative)      │ $280        │ -24%                │ │
│ │ DCF (Base Case)         │ $320        │ -13%                │ │
│ │ Private Market Value    │ $380        │ +3%                 │ │
│ └─────────────────────────┴─────────────┴─────────────────────┘ │
│                                                                  │
│ INTRINSIC VALUE ESTIMATE: $280-320                               │
│ MARGIN OF SAFETY: -15% to -30% (NEGATIVE = OVERVALUED)          │
├─────────────────────────────────────────────────────────────────┤
│ RECOMMENDATION:  [ ] BUY  [ ] HOLD  [ ] SELL  [X] WAIT          │
├─────────────────────────────────────────────────────────────────┤
│ STRONG BUY PRICE:         $224 (20x forward P/E of ~$11.20)     │
│ ACCUMULATE PRICE:         $280 (25x forward P/E)                │
│ FAIR VALUE:               $320 (28x forward P/E)                │
│ CURRENT:                  $370 (33x forward P/E)                │
│ TAKE PROFITS:             $400 (35x+ forward P/E)               │
├─────────────────────────────────────────────────────────────────┤
│ POSITION SIZE: 0% (WAIT for entry)                               │
│ CATALYST: Market correction or sector rotation                   │
│ PRIMARY RISK: Multiple compression if growth slows               │
│ SELL TRIGGER: Operating margin <22% or organic growth <5%        │
└─────────────────────────────────────────────────────────────────┘

Action Plan

1. Add to watchlist - Quality business deserving of ownership at right price
2. Set price alerts at $280 (accumulate) and $224 (strong buy)
3. Monitor quarterly for execution and growth trajectory
4. Wait for entry - Market correction, sector rotation, or company stumble

Why Terry Smith Owns This

Terry Smith's Fundsmith focuses on:

• High-quality businesses with pricing power
• Consistent growth with high returns on capital
• Long holding periods (buy and hold forever)

Stryker fits this profile perfectly. Smith likely bought at lower valuations and is content to hold through premium valuations given the long-term compounding potential.

Key Insight: Just because a great investor owns something doesn't mean it's a buy TODAY at TODAY's price.

Sources

Analysis by Claude | February 1, 2026