Stryker Corporation (SYK)

Total return at 5 years: 9.9%/year = 8.6% appreciation + 1.2% dividend. The target price ($428) is ex-dividend; the $20 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $474 · Multiples $361) exceeds the market price ($283).

Today — fairly valued: at $283 trades ~21.7% below its value discounted to today (~$361); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($428) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$226.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($283) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-2.1%/year) than we project (9.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$4.9 bn of owner earnings in year 5 (vs ~$8.5 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on NOPAT (EV/NOPAT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Diversified medical technology: valued at the enterprise level on EV/NOPAT over adjusted after-tax operating income (the non-GAAP basis the company reports), with cash and debt in the bridge. Rolling grid: year 0 uses FY2025 adjusted earnings ($5,267M, EPS $13.63) as a proxy for the TTM (revenue is the real TTM, $25,837M as of Jun 30, 2026) — the quarterly non-GAAP metric is not tagged in XBRL. The revenue starting point (+10.2%) is organic growth (volume +9.9% + price/mix +0.4%), consistent across FY24 (+10.2%) and FY25 (+10.3%) — cleaner than the reported figure (TTM +8.5%, which decelerates on the sale of the Spinal Implants business in April 2025). It decelerates gradually toward ~7.6% by year 5 (the band for a quality compounder, medical technology). The exit multiple is 18.5× (within the disciplined band for quality medical technology, 16-22×) as adjusted earnings compound ~10%/year. Cash does not accumulate: the declared capital strategy prioritizes acquisitions (57% of capital deployed in 2025) over dividends (15%) and buybacks (no amount declared); diluted shares rose slightly (net dilution from stock-based compensation).

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $428 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $283, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $428 in 5 years plus $20 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $361. Against the current market price ($283), the margin of safety is 21.7% (trades below the maximum → there is margin) and the total return at that price would be 9.9% annually.

• Multiple vs the band. EV/NOPAT ~21× adjusted operating income — above the ceiling of the quality med-tech band (16-22×). A full multiple, not a bargain.
• Current multiple. EV/NOPAT 21× adjusted operating income, above the quality med-tech band (16-22×).
• Margin of safety. 5-year base case ~$428 versus price ~$283 → total return +10%/year. A modest margin, not a wide one; the quality business is not on sale today.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (130%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. ROIC ~10.5% — above the bar, in the 'good' band (10-15%) but without wide headroom.
• Margin and stability. Gross margin ~64% (among the highest in the sector), stable year over year; adjusted earnings growing at a consistent double-digit rate.
• Quality of cash. CFROIC (~14%) above the accounting ROIC (~10.5%) — earnings are backed by real cash, not accruals. Modest stock-based compensation (~1% of revenue).

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Stryker's growth is mostly a volume phenomenon: in 2025 organic growth (+10.3%) was made up of +9.9pp of unit volume and just +0.4pp of price/mix — nearly the opposite of a consumer staple, where pricing carries the growth. Volume comes from surgical procedures (instruments, endoscopy), joint replacements (Orthopaedics) and capital equipment installations (cameras, monitors, the Mako robot) that generate recurring consumable sales. MedSurg and Neurotechnology (62% of revenue) is the growth engine; Orthopaedics (38%) grows more slowly but steadily.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. Organic growth (+10.3%, mostly volume) is real; the reported figure (TTM +8.5%) decelerates due to the sale of Spinal Implants, a stated change in perimeter, not a loss of traction.
• Growth engine. MedSurg and Neurotechnology (62% of revenue) is the growth engine (+15.7%, with Inari adding to it); Orthopaedics grows more slowly (+4.3%) via Mako.
• Deceleration and cycle. Organic growth is consistent (~10.2-10.3% for two straight years), with no signs of structural deceleration.

• Relevant in 10 years (recurrence). Medical devices and implants are a recurring, predictable business (demand tied to demographics and surgical volume, not fashion). High recurrence.
• Pricing power. Limited: 2025 growth was +9.9pp of volume against just +0.4pp of price/mix — pressure from consolidated hospital buyers limits pure pricing power.
• Moat and its direction. A wide moat (Mako plus patents plus regulation) and stable; widening in Orthopaedics via Mako, more diffuse in MedSurg.
• Capital cycle. A sector with high regulatory barriers that limit new capital entry; the competitive risk is rival consolidation (Zimmer Biomet, Medtronic), not new entrants.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)9.1x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 130% of ROIC
• !Value creation (ROIC − 10% bar)+0pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.5x — no over-investment
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 1.0% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt ~$11.8bn after financing $4,960M of acquisitions in 2025; interest expense grew +48.4% for the year. Manageable for a business with this cash flow, but more leveraged than its historical norm.
• Cash generation. Operating cash flow ~$5.5bn TTM comfortably covers the dividend ($1.3bn) plus capex ($0.8bn), with room to keep funding M&A.
• Dividend sustainability. Dividend declared $3.36/share (2025), +5.0% versus 2024; current rate $3.52 (+4.8% year over year). Low payout (~15% of capital deployed) — ample coverage margin.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

The stated capital strategy prioritizes acquisitions over dividends and buybacks: in 2025 the company allocated $4,960M to M&A (Inari Medical and others) versus $1,284M in dividends; the buyback amount was not disclosed in the MD&A (omitted, fail-closed) and diluted shares grew slightly (382.2M → 386.6M, +1.2% over three years) — net dilution from stock-based compensation, consistent with the low priority the company itself assigns to buybacks relative to M&A.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Insider ownership not available in this pipeline (DEF 14A proxy pending) — a declared gap, not an estimated one.
• Capital allocation. Stated priority: acquisitions (57% of capital deployed in 2025) > dividends (15%) > buybacks (amount not disclosed). Disciplined M&A through tuck-ins (Inari, Guard Medical, Advanced Medical Balloons).
• Continuity / integrity. Kevin Lobo, 15 years as CEO — long-term continuity. Reporting with detailed and transparent non-GAAP reconciliations.

• A sector rotation out of high-multiple medical technology, weighing on the share price.
• The new U.S.-China-European Union tariff regime announced in 2025 creates uncertainty over product costs and supply chains (a risk disclosed in the company's own 10-K).
• Ongoing product liability litigation over legacy hip devices (Rejuvenate, ABGII, LFIT, legacy Wright Medical products) generates a tail discount, though with no quantified exposure figure in the filing.

There is no clear missing-buyers/motivated-sellers source of discount: 21× remains above the disciplined quality med-tech band (16-22×), so the year's decline looks more like short-term noise (tariffs, legacy litigation) than a structural re-rating. The quality business trades at a full multiple, with a modest margin of safety.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -1%/year (-6% total): the margin of safety protects the downside. The bull (+15%/year, +105% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Legacy hip litigation. Rejuvenate, ABGII, LFIT and legacy Wright Medical products — with no quantified exposure figure in the filing; the new European Union directive (Dec 2026) expands exposure to class actions.
• Tariffs / supply chain. The U.S.-China-European Union tariff regime announced in 2025 pressures product costs; dependence on sole-source suppliers for components/sterilization.
• M&A integration. Inari Medical, Guard Medical and Advanced Medical Balloons (2025) require successful integration; risk that expected synergies fail to materialize.
• Pricing pressure. The consolidation of hospital buyers (including volume-based purchasing in China) limits pure pricing power — nearly all 2025 growth was volume, not price.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 11% above the 10% bar, but the margin is limited (+22%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 10% at a multiple/growth of 2.2 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 11% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -2% vs our 10%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -3%/yr, bull-scenario ceiling +14%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -2%, within what we project (10%) — the story squares with the numbers.