Company Overview: Zimmer Biomet Holdings, Inc. (NYSE: ZBH) was founded in 1927 and has its headquarters in Warsaw, Indiana. The company is one of the top worldwide leaders in musculoskeletal healthcare. It is involved in designing, manufacturing, and marketing orthopedic reconstructive products, sports medicine, biologics, office-based technologies, spine, craniomaxillofacial, dental implants, etc. The company has its operations in more than 25 countries and markets its products in over 100 countries.

ZBH Details

Expanding Geographical Reach & Robust Top-Line Growth Aid ZBH: Zimmer Biomet Holdings, Inc. (NYSE: ZBH) is a healthcare company, engaged in designing, manufacturing, and marketing orthopedic reconstructive products, biologics, sports medicine, extremities and trauma products, spine, bone healing, thoracic products, dental implants, and other associated surgical products. In 2015, Zimmer Holdings, Inc. (the legacy company) purchased Biomet, Inc. to form a new merged company. The company’s geographic segments include Americas, Europe, Middle East & Africa (EMEA) and Asia Pacific. The company remains on track to focus on high growth, and high priority areas in Knees, S.E.T. (Sports Medicine, Extremities and Trauma), Hips, and CMFT (Craniomaxillofacial and Thoracic). In doing so, the company is in the process to spin-off its Spine and Dental businesses. The spin-off plans to mark an important milestone in the company’s evolution into a more efficient organization. The plan also aids the company to focus on greater and more optimized resource allocation and improve its core businesses, where it predicts attractive market opportunities.

Notably, the company is seeing a steady recovery in the worldwide musculoskeletal market with higher sales growth in specific geographies on enhanced procedural volume. The gradual stabilization was primarily driven by favorable demographics and expanding consumption of musculoskeletal healthcare in emerging as well as under-penetrated developed markets. Based on this, the company remains positive about its distinguished portfolio that includes both premium and value-based offerings. Thus, gradual steadiness of the global musculoskeletal market and the Dental and Spine spin-off plan bode well for the company. Despite a difficult market circumstances, ZBH’s Core hip and S.E.T. business recorded a year over year growth in 1QFY21. Revenues from Hips and S.E.T. segments recorded an increase of 0.3% and 7.2% year over year, respectively, in 1QFY21.

The company’s total revenue and net income came in at $1,847.4 million and $198.1 million, respectively, in 1QFY21. This depicts a rise from $1,783.8 million of revenues and $508.5 million net loss reported in 1QFY20. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach.

Key Trends; Analysis by Kalkine Group

1QFY21 Key Highlights: During the quarter, the company reported adjusted earnings per share (EPS) of $1.71, which inched up 0.6% on pcp. On GAAP basis, ZBH’s earnings came in at 94 cents per share, as compared to a loss of $2.46 per share reported in the year-ago period. Net Sales for the quarter stood at $1.85 billion, depicting a rise of 3.6% year over year.  Geographically, revenues from Americas and Asia-Pacific increased 13% and 15.5%, respectively, on pcp. However, revenues from EMEA declined 10.3% year over year in 1QFY21. On a segmental basis, revenues from Knees unit went down ~5.2% year over year. Revenues from Dental & Spine unit came in at $246 million, up 9.6% year over year. Gross margin during the quarter stood at 72%, down 65 basis points (bps) year over year. Selling, general and administrative expenses and R&D expenditure were down by 7.1% and 4.1%, respective, year over year, in 1QFY21. Adjusted operating margin stood at 25.3%, up 454 bps on pcp.

Key Highlights; Analysis by Kalkine Group 

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter, with cash balance of $724.3 million. Long-term debt at the end of the quarter stood at $7.54 billion. Net cash inflow from operating activities during the quarter came in at $246.5 million.  In 1QFY21, gross margin, operating, EBITDA and net margins stood at 72%, 14.4%, 32% and 10.7%, higher than the industry median figures of 68.7%, 8.3%, 14.9% and 4.4%, respectively. In 1QFY21, ROE stood at 1.6%, higher than the industry median of 1.2%. Current ratio in the same time span stood at 2.39x, higher than the year-ago figure of 1.69x. Debt-to-equity in 1QFY21 stood at 0.63x, lower than 1QFY20 figure of 0.81x.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 34.95% of the total shareholdings, while the top 4 constitutes the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 7.63% and 5.27%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: On the flip side, pricing pressure continues to remain a major headwind for ZBH as it will be affected by cost control efforts by governmental healthcare, health systems and local hospitals. Further, stiff competition from peers in the medical devices market adds to the woes. The company’s business, financial, and operating conditions highly depends on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company. Also, rising expenses and a leveraged balance sheet may weigh on company’s financial performance, going forward. 

Outlook: Despite the near-term uncertainties, the company remains positive, reading the market recovery in 2021. Further, ZBH plans to invest higher in R&D and key commercial projects in FY21. For FY21, the company expects revenues to grow in the ambit of 14% to 17% year over year.  Adjusted EPS for FY21 is likely to be between $7.60 to $8.00 per share. Adjusted operating margins are expected to be in the range of 26.5% to 27.5% for FY21.  Looking forward, the company’s proposed spin-off of its Spine and Dental business is expected to accelerate growth and drive value creation in the business. The company is also doing well in its significant areas like supply improvement efforts, quality remediation, and product launches. This trend is expected to continue in the days ahead. The company also remains on track to bolster its foothold in the emerging markets, thus proposing long-term opportunities. Also, the company’s cost-cutting implementations is anticipated to partially offset the impact of COVID-19 led uncertainties.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~6.56%. The stock made a 52-week low and high of $112 and $180.36, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer’s average considering volatility in the market, pricing pressure, leveraged balance sheet and decline in EMEA revenues in 1QFY21. We have taken peers like Stryker Corp (NYSE: SYK), Medtronic PLC (NYSE: MDT), to name a few.  Considering the company’s decent 1QFY21 performance, geographical expansion, encouraging outlook, higher investments, cost cutting initiatives, and valuation, we give a “Buy” recommendation on the stock at the closing price of $164.18, down by ~2.13% on 26 May 2021.  

ZBH Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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