On Stryker, Taxes, the Super Committee and Growth

Obama’s Affordable Health Care Act of 2010 was paid for (in part) with an excise tax on implanted medical devices. The 2.3% excise tax goes into effect in 2013. It’s already causing some of those “unintended consequences” that we keep hearing about:

Top News
Stryker to cut jobs to offset excise tax impact
Thu, Nov 10 18:18 PM EST

Nov 10 (Reuters) - Medical device maker Stryker Corp said it will cut 5 percent, or about 1000 jobs to largely offset costs related to the scheduled implementation of the new Medical Device Excise Tax in 2013.

Steve Ferguson, the chairman of Cooke Group (another device manufacturer) had this to say about the excise tax:

"Many companies are being forced to limit investments in R&D in the U.S. and go abroad. Further, many companies are looking to reduce their U.S. capital investment. For Cook, we had planned on making additional investments in U.S. communities. Now, because of the tax, those plans are on hold."

I hope that this small example will confirm to any doubters that tax increases do have consequences. When taxes go up, jobs are lost. Investments in new plant and equipment are either deferred or are made outside of our borders. It’s that simple.

Stryker’s stock (SYK) has been in the doghouse of late. It’s down 22% since the establishment of the Super Committee (mandatory cuts in medical spending). The stock market has done what it’s supposed to do; adjust the multiple to reflect the changing realities.

SYK was trading at a 16X PE on Friday. That multiple might be justified. After all, Stryker is a pretty good company. You can’t go to a hospital without using their stuff. They make the beds you lie on and the scalpels they cut you with. They are also high tech. They make gizmos that will suck out your gall bladder in just a few minutes and leave a few small holes. They’re big in devices (hips, knees etc.).

The company is consistently profitable and has nice (15%) margins. It’s sitting on $3b of cash and functionally has no debt. For the suckers who think that dividends are the key to wealth SYK pays 1.5% and there’s every reason to believe the payout will grow. If one wanted to get a play on the global growth story, SYK is on the list. They’re everywhere. With rising incomes in Asia and aging populations in the West one would think the company is sitting pretty.

On the other hand, one could look at recent results. All the important lines are flatter then a pancake. What's the right multiple when top line is dead and the future is not so bright?

There are only 7 days left before the Super Committee efforts are to be released (they have to publish a plan 48 hrs before the 11/23 deadline). My sense has been that there will be no deal. That was confirmed today listening to the talk shows. We’re going to get big cuts in both healthcare and military spending as a result.

I wonder if the stock market has fully priced in the consequences for the few dozen companies whose future growth (or lack thereof) will be confirmed in a week. I also wonder what the big macro economists and players like the CBO, OMB, SSA and the IMF will say about revisions to US growth.

My guess is that the stock market has not fully priced this in and I’m convinced that the conclusion by the deep thinkers will be that long term US growth prospects have to be revised down, not up.