Company Overview: Zimmer Biomet Holdings, Inc. (NYSE: ZBH) is a multinational medical technology company focusing primarily on musculoskeletal healthcare. It designs, manufactures, and markets orthopedic reconstructive products, sports medicine, extremities and trauma (S.E.T.) products, spine, bone healing, thoracic products, dental implants, etc. The company operates in the Americas, Europe, Middle East, and Africa (EMEA), and Asia Pacific regions.

ZBH Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Significant Growth in Net Sales: In Q2FY21, the company's net sales were USD 2.03 billion, representing a 65.31% increase year-over-year (60.7% increase on a constant currency basis).
• Higher Operating Expenses: ZBH's R&D and selling, general, and administrative (SG&A) expenses for the quarter were USD 180.5 million and USD 817.4 million, respectively, higher than USD 87.7 million and USD 665.0 million for Q2FY20. The operating profit for Q2FY21 was USD 220.5 million vs. an operating loss of USD 171.7 million in the year-ago period.
• Improvement in Net Earnings: Net earnings for Q2FY21 amounted to USD 141.9 million vs. a net loss of USD 206.6 million in Q2FY20, representing diluted earnings per share (EPS) of USD 0.67.

Key Trends; Analysis by Kalkine Group 

Recent Key Developments:

• On August 18, 2021, the US Food and Drug Administration (FDA) granted 510(k) clearance to ROSA Hip System, a robotically assisted direct anterior total hip replacement on ZBEdge, ZBH's portfolio of integrated digital and robotic technologies.
• On June 10, 2021, ZBH's Board approved a quarterly dividend of USD 0.24 for Q2FY21. The cash dividend was paid on July 30, 2021, to stockholders of record on June 28, 2021.
• On June 07, 2021, it announced the appointment of Wilfred van Zuilen as President of EMEA, and Nitin Goyal, M.D., as Chief Science, Technology, and Innovation Officer, a brand-new role.
• On April 20, 2021, the company announced that it was granted the FDA 510(k) clearance for ROSA Partial Knee System.
• On February 05, 2021, ZBH stated that it plans to spin off its Spine and Dental business segments into a new public company (SpinCo). The spin-off is expected to be completed by mid-2022, subject to customary closing conditions.

Product-Wise Revenue Generation: The company witnessed both top and bottom-line growth in Q2FY21 (vs. Q1FY21 & Q2FY20) across all regions and product segments, resulting from the continued recovery from the global pandemic.

• Knees: Q2FY21 revenue amounted to USD 665.6 million, up 77.49% year-over-year, owing to a 74.3% increase in procedure volume.
• Hips: This segment generated USD 474.6 million in revenues in Q2FY21 vs. USD 329.7 million in Q2FY20, with an increase of 43.95% in volume.
• E.T.: Q2FY21 revenue was USD 462.1 million, up 57.87% year-over-year, with a 52.3% increase in volume and a 0.7% increase in their price.
• Dental & Spine: Q2FY21 revenue amounted to USD 263.5 million, up 73.01% year-over-year, primarily due to a 70.3% increase in volume.
• Other: This segment reported a 110.86% revenue growth in Q2FY21 to USD 161.1 million from USD 76.4 million in Q2FY20, owing to a 109.3% growth in volume. This category primarily includes surgical, bone cement, and office-based technology products.

Region-Wise Performance; Analysis by Kalkine Group

Balance Sheet & Liquidity Position

• Robust Cash Balance: The company exited Q2FY21 with a cash balance of USD 1.04 billion, 29.96% more than USD 802.1 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in H1FY21 was USD 700.4 million vs. USD 398.1 million in H1FY20.
• Reducing Debt: ZBH's total outstanding debt amounted to USD 7.85 billion at Q2FY21 end, lower than the total debt of USD 8.13 billion as of December 31, 2020.

Key Metrics: In Q2FY21, ZBH's EBITDA and operating margins were 28.1% and 10.9%, higher than the industry median of 14.9% and 7.0%, respectively. ROE stood at 1.3%, an improvement from (1.8)% in Q2FY20. Debt/Equity was 0.62x as of June 30, 2021, vs. 0.71x as of June 30, 2020.

Profitability & Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 35.13% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Co., N.A. hold the maximum stake in the company at 7.69% and 5.05%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Regulatory Pressure: The cost control efforts by governmental healthcare, health systems, and local hospitals put significant pricing pressure on the company. Also, it may be subject to suspensions/withdrawal of prior approvals if its products fail to comply with regulatory stipulations.
• Stiff Competition: It faces intense competition from its peers in the orthopedics and musculoskeletal care industry. The provision of better technology, quality, innovations, etc., by these competitors, could prove to be detrimental to ZBH's business.
• Economic Factors: The company's financial performance depends on the general economic conditions and the spending power of its customers/patients. Should the circumstances worsen, it may negatively impact ZBH's overall performance.

Outlook

• ZBH stated that while it is anticipating some pressure from the ongoing COVID-19 pandemic, it also expects its financial performance to improve with recovery in procedure volume during H2FY21.
• For the remainder of the year, it plans to continue investing in expanding its portfolio and developing and marketing unique and innovative products.
• Its estimated FY21 revenue growth ranges from 14.5% to 16.5%, with an operating profit margin of 26.5% to 27%.
• The adjusted diluted EPS is expected to range between USD 7.65 and USD 7.95.

Valuation Methodology: Price/Earnings Per Share 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 three months, ZBH corrected ~12.92%. The stock is currently close to the mid-point of its 52-week range of USD 129.15 to USD 180.36. We have valued the stock using the Price/Earnings Per Share multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the volatility in the market, risks involved with regulatory scrutiny, leveraged balance sheet, and the spin-off spine & dental business. We have taken peers like NuVasive, Inc. (NASDAQ: NUVA) and Medtronic plc (NYSE: MDT). Considering the robust top and bottom-line growth, higher investment in the business, strategic growth initiatives, encouraging Outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 144.38, down ~2.35% as of August 18, 2021.

ZBH Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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