Earnings Preview: Zimmer Holdings - Analyst Blog

By Zacks Equity Research,

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Zimmer Holdings ( ZMH ) is scheduled to release its fourth quarter and fiscal 2011 earnings on Thursday, January 26, 2012, before the market opens.

The company is expected to earn $1.34 per share on revenues of $1,160 million for the quarter and $4.78 on revenues of $4,448 million for the full year, according to the Zacks Consensus Estimate. For fiscal 2011, the company guidance stands at $4.75−$4.80 with revenue growth of 2.3−2.7% at constant exchange rates (CER).

With respect to earnings surprises, over the trailing four quarters, Zimmer was consistent in outperforming the Zacks Consensus Estimate. The four-quarter average earnings surprise of 3.67% implies that the company has exceeded the Zacks Consensus Estimate by this magnitude over the period.

Previous Quarter Highlights

Zimmer reported an adjusted EPS of $1.04 during the third quarter of fiscal 2011, a penny ahead of the Zacks Consensus Estimate and up from 96 cents in the corresponding quarter of fiscal 2010. Revenues increased 6.9% year over year (2.4% at CER) to $1,031 million during the quarter, in line with the Zacks Consensus Estimate.

Zimmer's biggest segment, Reconstructive Implant, recorded a 6% increase in revenue to $768 million driven by growth in Asia Pacific (21% to $147 million), Europe (17% to $199 million), partially offset by a 2% decline in the Americas to $422 million. Revenues from Knees (within Reconstructive), Hips and Extremities recorded a respective growth of 3% to $417 million, 10% to $315 million and 7% to $36 million. Among the other segments at Zimmer, barring Spine that declined 2% to $55 million, growth was witnessed across the board including Surgical and Other (8% annually to $84 million), Trauma (19% to $69 million) and Dental (12% to $55 million).

Agreement of Analysts

Estimate revision trends over the last 30 days were insignificant. Only 1 analyst raised his/her estimate for the fourth quarter with the same number moving in the opposite direction. For the current fiscal, estimates were raised by 2 analysts in the past month with 1 southward movement. In the last 7 days, estimates for the current fiscal were revised in both directions by 1 analyst each.

Given the lack of significant estimate revisions, Zimmer is expected to report in line results during the quarter. Main investor focus will remain on the company's guidance for 2012. Moreover, we await an update from the company regarding the current dynamics of the orthopedic market, pipeline development programs, achievement so far in cost reduction initiatives among others. 

During the last reported quarter, the FDA completed a periodic inspection at Zimmer's Warsaw manufacturing site. As fallout the company received a number of observations and a Form 483. The company is already working on a plan to resolve this matter. The agency is expected to conduct a re-inspection to confirm if the issues have been properly addressed. We expect an update from the company regarding this issue.

Magnitude of Estimate Revisions

Given the dearth of estimate revisions, the current Zacks Consensus Estimate for the fourth quarter was static at $1.34 over the past 30 days. The consensus estimate for fiscal 2011 also remained unchanged at $4.78 for the last 30 days.

Our Recommendation

Zimmer offers a broad line of reconstructive implant and trauma products as well as orthopedic surgical instruments and supplies. We believe that the company is on its growth trajectory through new product launches, employment of new technologies and expansion into the emerging markets.

However, Zimmer continues to witness challenges in the form of pricing pressure and lower procedure volumes resulting from economic uncertainty. The company faces tough competition from players such as Smith & Nephew ( SNN ), Johnson & Johnson ( JNJ ) among others.

Zimmer retains a Zacks #3 Rank (Hold) in the short term. We also have a 'Neutral' recommendation on the stock.

JOHNSON & JOHNS ( JNJ ): Free Stock Analysis Report
SMITH & NEPHEW ( SNN ): Free Stock Analysis Report
ZIMMER HOLDINGS ( ZMH ): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: JNJ , SNN , ZMH

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