Better Investment: Medtronic Vs Stryker

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Executive Summary

The New Year started off well in the US medical devices industry and shows no signs of slowing down in 2008. The robust demand for medical equipment and the increasingly ageing population helped the shares of several medical devices makers outperform the market in the second half of 2007. We maintain the belief that, as a whole, the medical device industry is highly profitable with high barriers to entry. In addition, during periods of economic uncertainty, medical equipment has seen continued gains.

We are evaluating two companies within the Medical Equipment Industry: Stryker Corp. (NYSE:SYK) and Medtronic Inc. (NYSE:MDT). Our main goal is to analyze which company might make a better investment.

Stryker Corp (NYSE: SYK)

We are recommending a buy at a price target of: $78.90

Market data as of: 07/18/2007

STOCK PRICE: $64.52

ANNUAL DIVIDEND: $0.33

MARKET CAP: $26.58B

PRICE TO EARININGS: $25.34

(TRAILING 12MOS)

PRICE TO EARNINGS: $25.69

(FORWARD 12MOS)

FULL YEAR ENDED 12/31/

2004 2005 2006 2007

Total Net Sales $4,262,300 $4,608,900 $5,147,200 $6,000,500

Sales Growth 17.57% 8.13% 11.68% 16.58%

Operating Income $720,400 $998,800 $1,074,300 $1,307,300

Operating Margin 16.90% 21.67% 20.87% 21.79%

Net Income $465,700 $675,200 $777,700 $1,017,400

Net Margin 10.93% 14.65% 15.11% 16.96%

Earnings Growth 2.69% 44.99% 15.18% 30.82%

Medtronic, inc. (NYSE: MDT)

We are recommending a buy at a price target of: $ 56.50

Market data as of: 07/18/2007

STOCK PRICE: $53.43

ANNUAL DIVIDEND: $0.19

MARKET CAP: $60.12B

PRICE TO EARININGS: $27.37

(TRAILING 12MOS)

PRICE TO EARNINGS: $19.73

(FORWARD 12MOS)

FULL YEAR ENDED 04/25/

2004 2005 2006 2007

Total Net Sales $10,054,600 $11,292,000 $12,299,000 $13,515,000

Sales Growth 10.65% 12.31% 8.92% 9.89%

Operating Income $2,788,900 $3,240,600 $3,698,989 $3,212,000

Operating Margin 27.74% 28.70% 30.08% 23.77%

Net Income $1,803,900 $2,546,700 $2,802,000 $2,231,000

Net Margin 17.94% 22.55% 22.78 % 16.5%

Earnings Growth -7.93% 41.18% 10.02% -20.38%

INVESTMENT THESIS

Stryker Corp is more attractive than Medtronic over the next 12-18 months. Stryker reported that its net income rose by 31% to US$1.02 billion, in 2007 compared with US$777.7 million in 2006. The increase in earnings was due to the weaker dollar, while domestic demand for its orthopedic implants and MedSurg equipment helped drive up revenue. The rise was also due to strong international sales of orthopedic implants and medical equipment.

The Company’s outlook for 2008 continues to be optimistic regarding underlying growth rates in orthopedic procedures and sales growth rates in the Company’s broadly based range of products in orthopedic and other medical specialties, despite the potential for increased pricing pressure in certain markets. The Company projects that diluted net earnings per share for 2008 will approximate $2.88, representing a 22% increase over diluted net earnings per share from continuing operations of $2.37 for the year ended December 31, 2007.

The financial forecast for 2008 includes a constant currency net sales increase in the range of 11% to 13% as a result of growth in shipments of orthopedic implants and MedSurg Equipment. If foreign currency exchange rates hold near December 31, 2007 levels, the Company anticipates a favorable impact on net sales of approximately 2.5% to 3% in the first quarter of 2008 and a favorable impact on net sales of approximately 1% to 1.

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