Streetwise
Lauren Rudd
Sunday, October 25,
2009
Fear, Hope and Greed Still Drive the Street
The recent gains on Wall Street have resulted in a resurgence
of concern that fear, hope and greed are once again the driving forces behind
the financial markets’ success. I hate to mention this, but when have they not
been?
You need to accept Wall Street for what it is, keeping in
mind that emotions often run amok. This was well demonstrated recently when the
Dow Jones industrial average suffered a 170 point drop from the day’s peak to
trough. The main reason - a single Wall Street analyst voiced concerns over the
performance of a single bank and placed a sell recommendation on the shares.
The Street’s professionals are quick to take advantage of
such situations, profiting from the errors and poor judgment of the less
informed. If you are tempted to jump in to get your share of the spoils, forget
it. For the average investor, trying to outmaneuver the markets is like trying
to herd cats, a great idea but one with little probability of success.
Nonetheless, Wall Street still offers up the greatest
potential for accumulating wealth. However, you are obligating yourself to
undertaking a minimum of necessary research. Simply taking the word of others
will, at best, limit your gains. At worst, you become an easy meal of raw meat.
Furthermore, the days of buy and hold with unremitting
patience are long gone. The decision to sell is as important as deciding what
and when to buy. Again, research is the key.
So where do you start? One suggestion might be to look at
some demographic trends. For example, the number of adults over 65 in the United
States alone is expected to grow from about 35 million in 2000, to about 71
million by 2030. In developing countries the number is projected to nearly
triple from 249 million to 690 million.
Two companies that are well positioned to take advantage of
this trend are Zimmer Holdings (ZMH) and the Stryker Corporation (SYK). Zimmer
manufactures orthopedic reconstructive implants, dental reconstructive implants
and spinal implants. It also offers surgical products, including supplies and
instruments.
Stryker is similar, operating in two business segments,
orthopedic implants and medical and surgical equipment. The orthopedic division
sells reconstructive implant systems, bone cement and the bone growth factor
OP-1. The equipment division sells surgical equipment as well as patient
handling and emergency medical equipment.
Zimmer recently released earnings for the third quarter of
$0.70 per share, down from $0.95 per share a year ago. If you exclude one-time
items, earnings were $0.88 per share. Sales rose 2 percent to $975.6 million. In
its guidance for the year, the company said it expected a 1 to 3 percent
increase in revenues and earnings of between $3.85 and $4.00 per share.
Zimmer’s intrinsic value using a discounted earnings approach
is $92 per share, while the more conservative discounted free cash flow to the
firm approach yields an intrinsic value of $79. My earnings estimate for this
year is $3.90 per share and $4.25 for 2010, with a 12 month target price of $60,
for a capital gain of 15 percent over the recent price of 52.23.
Stryker recently reported third-quarter earnings of $0.57 per
share, down from $0.66 per share a year ago. If you exclude special items, the
company earned $0.69 per share. Net sales in the quarter were flat at $1.65
billion, compared with a year ago. The company updated its earnings guidance for
this year to between $2.90 and $3.00 per share. Of note is Stryker’s 16 years of
dividend increases.
The intrinsic value of the shares is $90, using the discounted earnings approach
and $104 with the free cash flow to the firm approach. My earnings estimate for
this year is $2.98 and $3.30 for 2010, with a 12 month target price of $53, for
a capital gain of 10.4 percent over the recent price of $48. There is also a
0.90 percent dividend yield.
