A Case Study of Buying on Weakness: Don Yachtman and Stryker Stock

Don Yacktman and his co-managers at the eponymous Yacktman Fund and Yacktman Focused have been crushing it of late. The 10.3% annualized gain for Yacktman Focused over the past five years is more than 9 percentage points ahead of the S&P 500. If that whets your desire to portfolio peep, you might want to check out medical firm Stryker Corp (SYK).

In the third quarter Yacktman Asset Management increased its Stryker stake from 5.59 million shares to 9.72 million. That means Yacktman has more than a half a billion dollars riding on Stryker based on its recent price. That’s about 3.2% of Yacktman’s assets under management.

Stryker certainly seems to need some mojo replacement surgery; its 2012 performance has been thumped by rival Zimmer Holdings (ZMH) and the market benchmark, as seen in a stock chart.

SYK Chart

SYK data by YCharts

Stryker has taken two stiff blows this year, one self-inflicted. In February CEO Scott MacMilllan abruptly resigned for personal reasons that were concerning enough for Stryker to yank a bunch of MacMillan’s stock options as he headed for the exit. It wasn’t until early October that the firm formally named Kevin Lobo the new President and CEO. Lobo had joined Stryker in 2011, coming over from Johnson & Johnson’s (JNJ) medical device unit. (Lobo’s ascension triggered the resignation of Stryker’s long-time CFO who had been acting CEO since February…so the firm now needs to find a new CFO.)

The other big problem was, in a word, Europe. Stryker recently lowered its 2012 earnings growth estimate to 8% (down from double digits) and scaled back its 2013 guidance as well.

Stryker is one of the more cyclical plays in the health care sector. When wallets are being pinched, consumers might put off a knee or hip replacement—at least temporarily. And that’s what seems to be happening in Europe right now, where Lobo said sales have seen “single digit declines.” He also warned that Stryker views the sluggishness as “a new normal at least for the next little while and that's the reason for our adjustment to the guidance for both 2012 and 2013.”

Stryker also took a $33 million charge in the second quarter to cover the cost of a offer made to the U.S. Dept. of Justice to settle an investigation into Stryker’s marketing of an artificial knee replacement that had yet to win FDA approval.

So what’s with Yacktman’s increased interest? Yacktman looks for dominant market players that are doing a good job spitting out free cash flow. Stryker is delivering on the cash flow.

SYK Free Cash Flow TTM Chart

SYK Free Cash Flow TTM data by YCharts

And yet at the same time, the stock price hasn’t budged much, so another favored Yacktman metric-free cash flow yield-has been on the climb.

SYK Free Cash Flow Yield Chart

SYK Free Cash Flow Yield data by YCharts

Meanwhile valuation has gotten cheaper, looking at the PE ratio, amid solid growth.

SYK Book Value Per Share Chart

SYK Book Value Per Share data by YCharts

And for the dividend inclined, Stryker recently announced an 18% increase in its payout. The average dividend increase for the past five years has been north of 25%. That’s not sustainable. But even if the current payout pace were to be cut in half, it’s still going to be more than double the long-term rate of inflation.

Carla Fried is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



Please note that this feature is only available as an add-on to YCharts subscriptions.

Please note that this feature requires full activation of your account and is not permitted during the free trial period.

Start My Free Trial {{root.upsell.info.call_to_action}} No credit card required.

Already a subscriber? Sign in.