ROIC Comps Example: Orthopedic Supplies

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I like to get a handle on capital productivity for a company pretty early in the process of working on a stock because I am simply not going to own something unless I am excited about its ROIC level. Sure, it may not be sustainable, and the stock may be trading at a price that is too high for that capital productivity, but feeling good about the company’s ROIC is somewhat of a gating issue. If the business can’t earn economic profits, and I don’t have the threads of a thesis (see ROIC thesis buckets here) on why that will change for the better in the future, I am on to the next one.

With this in mind, I have attached a template I use for looking at a company’s ROIC – maybe you will find it useful and will modify it for your own purposes. Let me know your suggestions for improvements!

In early 2023 I was looking at a UK company called Smith & Nephew PLC. It makes medical devices – mostly orthopedics. My take (everyone has their own) was that the truly comparable companies are Zimmer Biomet ZBH 115.14 -1.19 -1.02% and Stryker SYK 341.14 +1.83 +0.54%. For ROIC comps I try to not go crazy with too many companies because putting them together is a fair amount of work.

Below is a grab of the summary screen for these comps. Double-click on the grab to enlarge it so it’s readable – same for all of the following grabs in this post and on the rest of this blog. The excel sheet itself is also embedded at the bottom of this post.

The top part is a summary of what each business does and a bit on each’s segment mix. This is important for a variety of reasons, including that we have to know how truly comparable these businesses are in their operations and revenue/income generation when comparing ROIC levels.

The time series graphs show ROIC (including and not including goodwill and other intangibles) and the amount of invested capital for each of the last five years through 3Q22. You can see the supporting data in the embedded excel sheet below.

Some quick takeaways:

Here is the full excel sheet:

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