Zimmer Biomet (ZBH, Financial) is a global leader in musculoskeletal health care. The company designs, manufactures and markets orthopedic reconstructive implants and supplies surgical equipment for orthopedic surgery.
These products cover the areas of sports medicine, biologics, extremities, trauma products, spine, craniomaxillofacial, thoracic products, dental implants and related surgical products.
With the acquisitions of Centerpulse in 2003 and Biomet in 2015, Zimmer holds the leading share of the reconstructive market in the U.S., Europe and Japan. Approximately 70% of total revenue is derived from sales of large joints, with the other 30% coming from extremities, trauma and related surgical products.
Zimmer was founded in 1927 and is based in Warsaw, Indiana. It currently has a market capitalization of $25 billion.
Products
Knees are a big part of the company’s revenues. Total knee replacement surgeries typically include a femoral component, a patella, a tibial tray and an articular surface. Knee replacement surgeries include first-time, or primary, joint replacement procedures and revision procedures for the replacement, repair or enhancement of an implant or component from a previous procedure.
Hips are another big component of the company’s business. Total hip replacement surgeries replace both the head of the femur and the socket portion of the pelvis of the natural hip. Hip procedures include first-time, or primary, joint replacement as well as revision procedures.
The remainder of products fall under the S.E.T. category. This primarily encompasses sports medicine, biologics, foot and ankle, extremities and trauma. The spine and dental segment has been spun off.
The ZimVie spin-off
Zimmer Biomet previously announced its intent to spin off its dental and spine businesses into a standalone, publicly traded company called ZimVie (ZIMV, Financial). The transaction was completed on March 1, 2022.
CEO Bryan Hanson stated:
"The spinoff of ZimVie marks a major milestone in the active portfolio management of Zimmer Biomet as we continue to strengthen our position as a global leader in the medtech space. We are confident that this transaction will create shareholder value for both companies and will allow us to increase our focus and enhance revenue growth for our core businesses."
The spinoff was achieved through the distribution of 80.3% of the shares of ZimVie to holders of Zimmer Biomet common stock on the transaction date, with Zimmer Biomet stockholders receiving one share of ZimVie common stock for every 10 shares of Zimmer Biomet common stock they held at the time.
Financial results
The company's most recent full-year results were for 2021. Net sales for the full year were $7.836 billion, an increase of 11.6% over the prior year, and an increase of 10.3% on a constant currency basis. Net earnings were $401.6 million, or $1.55 million on an adjusted basis.
GAAP earnings per share was $1.91 for 2021. However, the financial results were affected by asset impairments, restructuring costs and acquisition costs. Adjusted EPS according to the company was $7.37 in 2021.
Zimmer Biomet traditionally generates strong free cash flow on an annual basis. Free cash flow over the past three fiscal years has been $1.0 billion, $795 billion and $1.0 billion sequentially.
Dividend payments last year totaled $200 million, or $0.94 per share. The dividend yield is only 0.80%.
Valuation
Analyst consensus estimates call for EPS of approximately $6.52 in 2022 and $7.18 for 2023. Those estimates are adjusted for the spin-off of ZimVie, which reduced EPS by about $2.00. The high-teens forward price-earnings ratios puts the stock's valuation in line with the overall market, but below most of its peers. The company’s forward enterprise-value-to-Ebitda ratio for 2022 is approximately 11.
Guru trades
Gurus who have added to their Zimmer Biomet positions recently include Sarah Ketterer (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio) and Jim Simons (Trades, Portfolio). Gurus who have reduced their positions include Mario Gabelli (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
Conclusion
Zimmer Biomet's stock appears to be fairly valued in my view, but long-term gains will likely occur due to the overriding demographic of an aging population. In the near term, a meaningful Covid-19 backlog recovery may provide a substantial boost to the company’s revenues. During the early stages of the Covid-19 pandemic, elective orthopedic related procedures were delayed because of the absence of available hospital beds, but this headwind should be less of an issue as new Covid-19 cases decline.
Zimmer Biomet sits near the lows of its 52-week range. If the company can execute its strategic growth plans, earnings growth and multiple expansion are likely to follow. In addition, the company's free cash flow levels allow for substantial dividend increases if the company finds thats to be an appropriate use of capital.
