Stryker Corporation (SYK), Johnson & Johnson (JNJ): This Niche Player Will Make Investors Rich

Johnson & Johnson (NYSE:JNJ) has both the cash flow and the know-how to compete with Stryker. Still, Stryker has shown that it can leverage its niche to compete against much larger players in the healthcare sector.

Valuation

Stryker trades at 18x earnings, which is the same at a 5.5% earnings yield. The company grew EPS at an annual rate of 12% over the last ten years, 6.5% annual rate over the last six years, and a 3% annual rate over the last two years.

It’s not a good sign that EPS growth has been decelerating. But once you factor in the deep recession and Stryker’s future growth opportunities, a few back-of-the-envelope calculations make the stock look pretty appealing:

5.5% current yield + 3% growth = 8.5% annual return

5.5% current yield + 6.5% growth = 12% annual return

5.5% current yield + 12% growth = 17.5% annual return

I do not think that investors who buy today will get a 17.5% annualized return. I think 12% is a stretch for investors to expect, though it is certainly achievable. I think investors can count on a 9% to 10% annualized return over the long run, which is better than the S&P 500 will do over the next decade. Therefore, Stryker Corporation (NYSE:SYK) represents a solid investment opportunity for the enterprising investor.

The article This Niche Player Will Make Investors Rich originally appeared on Fool.com and is written by Ted Cooper.

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