Regardless of what happens in the new year, it's a safe bet that medical appliance makers like Zimmer Biomet (ZBH, Financial) will continue to thrive. Now, thanks to the fourth-quarter market sell off, Zimmer's stock is a bargain again.
Zimmer Biomet is the leader in hip and knee reconstruction products with majority share in the U.S., Japan and across Europe. With an aging baby boomer population here in the U.S. and rising global population, it will see at least a percentage of people in need of joint repair. Zimmer has built a network of close relationships with orthopedic surgeons who make switching costs high since they tend to stick with their primary vendors, and bring in profitable procedures to keep hospital administrators from serving their own interests. The risk is that as medical insurance and other business costs rise, surgeons will become less likely to open private practices and more reliant on hospitals, which will then be able to determine product selection.
Zimmer sells its products under a variety of brand names -- NexGen, Zimmer, VerSys, SoPlus and Pulsavac -- but has recently had manufacturing and supply issues at a facility in Warsaw, Indiana, which were not in compliance with safety regulations. The company didn't upgrade the plant after Zimmer's purchase of Biomet. That along with trade concerns and overall economic risk factors has pushed Zimmer's stock down close to 25% since October.
But the need for its products is still strong and without a true competitor, the company is still on pace to earn north of $8 per share in 2019. Zimmer also looks even cheaper when compared to other big names in the industry such as Boston Scientific (BSX, Financial), Medtronic (MDT, Financial) and Abbott Labs (ABT, Financial), which trade with forward price-earnings ratios closer to 20x. At 20x on $8 per share, Zimmer Biomet would price just below $160 sometime next year. With the stock currently trading just above $100 a share, that would be a 60% gain with more to come.
The orthopedic market is estimated to double to $60 billion by 2023. Zimmer Biomet will likely only expand its dominance as it focuses on growth and innovation. The company's Persona branded Partial Knee system and Tibia products continue to gain market share, and Zimmer is also working with Apple to conduct a broad clinical study that seeks to connect knee and hip patients with their caregivers.
Five-year financial snapshot
This year has been very difficult for the company, yet it is stronger fundamentally with sales and profit reaching all time high marks. Skeptics may point to the company's debt, which now sits above $9 billion, but that's still just 5x its net income and roughly 3x Ebita, which is perfectly manageable for the medical device leader. In fact, that debt-income rate is lower than that of each of the three device makers listed above. And, as that debt load shrinks in the coming years, the value of the company will only accelerate. The stock could very well double in the next three to four years.
Disclosure: I am not long or short any stock mentioned in this article.
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