December 19, 2008 / 1:50 PM / 11 years ago

UPDATE 2-Stryker cuts '08 outlook as hospitals pare budgets

(Recasts, adds analyst, company comments, shares)

By Lewis Krauskopf

NEW YORK, Dec 19 (Reuters) - Medical device maker Stryker Corp (SYK.N) cut its 2008 sales and earnings forecasts on Friday as a “significant and rapid contraction” in hospital capital budgets hurts demand for its products.

The company expects tight hospital budgets to continue into next year. Shares rose 0.4 percent, underperforming gains for the broader market.

“The unprecedented weakening of the economy has caused the company’s hospital customers to reduce capital purchases to a degree not previously experienced in prior recessionary periods,” Stryker said in a statement.

Stryker lowered its 2008 revenue growth forecast to a range of 9 percent to 10 percent on a constant currency basis from a prior outlook of 11 percent to 12 percent. Stryker cited lower-than-expected fourth-quarter sales.

Kalamazoo, Michigan-based Stryker sees weaker demand for certain products in its MedSurg division, which makes up about 40 percent of overall revenue.

The more capital intensive businesses in MedSurg are its endoscopy segment, and its medical segment, which includes hospital beds and stretchers. The division also includes its instruments business, which includes a range of products used in general surgery.

Stryker expects 2008 earnings of $2.77 to $2.79 per share. That includes a fourth-quarter restructuring charge of $20 million, or about 5 cents a share, that the company announced on Friday.

The charge relates to a restructuring of its Japanese distribution business and a move to reduce development efforts tied to its 2006 acquisition of Sightline Technologies.

Excluding the charge, Stryker forecast 2008 earnings of $2.82 to $2.84 per share. In October, it projected about $2.88.

Stryker does not provide quarterly earnings forecasts, but based on the results from the first three quarters, the new outlook equates to a roughly 6 percent reduction in the expectation for fourth-quarter earnings.

JP Morgan analyst Michael Weinstein said the outlook cut suggests a meaningful decline in the MedSurg business. He said he was surprised in “both in the scale of the decline and the speed with which it has shown up in the company’s numbers.

“If the impact is truly confined to MedSurg alone, then this represents a precipitous decline in fundamentals,” Weinstein said in a research note.

“We’re surprised that this morning’s announcement isn’t weighing on the group more broadly, as it highlights the impact the current credit and economic environment is having on hospital spending behavior,” Weinstein said.

Stryker Chief Executive Stephen MacMillan said recessions have typically had little effect on the company.

“The current pressures on hospital capital expenditures have had a significant adverse affect on our business in this quarter, which is typically the strongest for capital purchases,” MacMillan said in a statement.

He added that Stryker still expects to be “one of the few Fortune 500 companies” to increase profits by 18 percent this year.

Stryker plans to give its 2009 forecast in early January, and expects tight hospital budgets to continue into next year, said spokeswoman Katherine Owen.

“It will continue into ‘09. It will be one of the factors dialed into our expectations,” Owen said.

Stryker shares rose 15 cents to $40.21 in morning trading on the New York Stock Exchange. (Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn and Derek Caney)

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