Stryker: M&A still top priority for cash, but spent only $92M in first half on acquisitions

Stryker ($SYK) reiterated that acquisitions are its top priority for cash. But so far during the first half of this year, the orthopedics giant has spent a mere $92 million of its cash on acquisitions--while accruing an additional $1.8 billion in cash to sit on a pile of a whopping $3.6 billion in cash at the end of last quarter.

Stryker CEO Kevin Lobo

So far this year for Stryker, other uses of cash--like dividends and share repurchases--have claimed more of its cash than acquisitions. During the first half, it spent $271 million on shareholder dividends and $324 million on share repurchases. The company is actively repatriating cash to the U.S.: about $700 million in the first half with another almost $1 billion before year end. Earlier this year, it authorized $2 billion share repurchase program.

"We still have M&A as our first priority and use of cash and you can see based on the activities done over the past couple of years, they are contributing to our esteemed organic growth performance," Stryker CEO Kevin Lobo said on the earnings call.

In 2014, Stryker bought companies including small joint replacement player Small Bone Innovations for about $358 million, German surgical equipment company Berchtold Holding for $184 million, surgical foreign object retention company Patient Safety Technologies for $120 million, and hip arthroscopy company Pivot Medical for an undisclosed amount. Its acquisitions added 0.7% last quarter--but this is the ninth quarter in a row during which the company achieved organic sales growth of at least 5%.

The company made its largest recent acquisition in December 2013 with its purchase of robotic surgery company Mako Surgical for $1.7 billion.

Relatively high valuations may be putting a bit of a damper on Stryker's acquisition activity. "I would say clearly valuations have moved up. We are always confronted with challenges around valuations, sellers' expectations even in an environment that hasn't been quite as strong as recently," said Stryker VP of Strategy and Investor Relations Katherine Owen on the earnings call. "It hasn't changed our priority around M&A but it certainly does become an issue on some deals and that does impact the numbers we look at."

Overall, Wall Street was pleased with Stryker's performance last quarter, sending shares up about 2% in early trading on earnings news that included a bump up to its 2015 sales growth expectations to a range of 6.5% to 7.5% from 6% to 7% due to stronger-than-expected organic sales increases. It also bumped EPS expectations up to $5.06 to $5.12 from $4.95 to $5.10.

This year, Stryker has announced only two acquisitions--both small deals for regional hospital bed players. Owens took the earnings call as an opportunity to examine the logic behind the most recent one, for its Turkish partner Muka Metal. The company sees Muka's products as a good fit for the Turkish region and some Latin American markets, but not aimed at the U.S. in the near-term.

"We had a relationship with them, a distribution agreement going back to 2012. The company has been around for nearly 50 years, a private company based out of Turkey, and they've done a great job," she said. "They specialize in the design and manufacture of hospital beds and structures and they've been primarily serving the Turkish market around eight countries. So it's a great opportunity for us to build a presence in that segment with a premium value product."

- here are the earnings release and transcript