In this article, let's take a look at Zimmer Holdings, Inc. (ZMH, Financial), a $19.38 billion market cap company, spun off by Bristol-Myers Squibb (BMY, Financial) in August 2001; and manufactures orthopedic reconstructive implants, fracture management products, and dental implants.
Leader position
Zimmer operates in a competitive industry, but we must mention that it has good prospects due to the given aging populations and rising obesity levels. The firm must make advances in innovation of its technological and product quality. We believe the company has a good brand reputation, as well as good service. With a portfolio of brands such as NexGen, Zimmer, VerSys, SoPlus, and Pulsavac it holds a strong position in American, European and Japanese markets.
Antitrust regulation
The principal risk is the future acquisition of Biomet because both companies are headquartered in Warsaw, Indiana; and the integration could be somewhat complicated when considering the companies' products. The deal is expected to be closed in the first quarter of next year, and considering the overlapping of products we mentioned before, the antitrust regulators could indicate some divestitures.
Estimated one-year price
According to Yahoo! Finance, the estimated one-year target share price is $123.14, so if you buy shares at current market price ($111.47), your return from price appreciation would be 10.5%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $0.88 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 0.8%. So the total expected return for investing in Zimmer is 11.3%, which we believe is an attractive stock return.
Revenues, margins and profitability
Looking at profitability, revenues grew by 2.95% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.96 vs. $0.90). During the past fiscal year, the company increased its bottom line. It earned $4.43 versus $4.29 in the prior year. This year, Wall Street expects an improvement in earnings ($6.05 versus $4.43)
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| ZMH | Zimmer | 12.63 |
| BAX | Baxter International Inc | 22.29 |
| COV | Covidien PLC | 17.24 |
| Â | Industry Median | 5.2 |
The company has a current ROE of 12.63% which is higher than the industry median.In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Baxter (BAX, Financial) and Covidien (COV, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of24.7x, trading at a discount compared to an average of 96.4x for the industry. To use another metric, its price-to-book ratio of 2.96x indicates a premium versus the industry average of 3.92x while the price-to-sales ratio of 4.2x is above the industry average of 3.25x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $19,954, which represents a14.8% compound annual growth rate (CAGR).
Final comment
We feel the strengths could offset the fact that the company shows weak revenue and EPS results. Further, the PE relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio), Scott Black (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), John Rogers (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), David Dreman (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as RS Investment Management (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
