Earnings Scorecard: Zimmer - Analyst Blog


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The announcement of Zimmer Holdings ' ( ZMH ) fourth quarter and fiscal 2011 results as on January 26, 2012, has led analysts to revise their estimates lower for the first quarter of fiscal 2012. The scenario, however, improves for the second half and onwards.

Previous Quarter Highlights

Zimmer reported an adjusted EPS of $1.36 during the fourth quarter of fiscal 2011, up 7.1% year over year and a couple of cents ahead of the Zacks Consensus Estimate. During the reported quarter, the company recorded $108.0 million provision for claims related to the Durom Acetabular component, which has been taken into account in the adjusted figure. For the full year, the adjusted EPS increased 10.9% to $4.80, surpassing the Zacks Consensus Estimate of $4.78.

Revenues were $1.17 billion, up 2.9% on a reported basis and 2.4% at constant exchange rates ("CER"), in line with the Zacks Consensus Estimate. For the fiscal year, revenues increased 2.6% at CER to $4.45 million, at par with the Zacks Consensus Estimate. While revenues generated in the Americas remained unchanged at $620 million, revenues from Europe and Asia-Pacific increased 6% (at CER) to $338 million and 5% to $209 million, respectively.

Zimmer's biggest segment, Reconstructive Implant, recorded a 2% increase in revenue (at CER) to $877 million driven by growth in Asia Pacific (6% to $154 million), Europe (6% to $267 million), partially offset by a 2% decline in the Americas to $456 million. Revenues from Knees (within Reconstructive) remained unchanged at $475 million while Hips and Extremities recorded a respective growth of 4% (at CER) to $358 million and 9% to $44 million.

Among the other segments at Zimmer, barring Spine that declined 6% (at CER) to $56 million, growth was witnessed across the board including Surgical and Other (5% annually to $93 million), Trauma (11% to $77 million) and Dental (2% to $64 million).

Zimmer also unveiled its outlook for 2012, which was more or less in line with the Zacks Consensus Estimate.

For a full coverage on the earnings, read: Zimmer Beats Estimates

Agreement of Analysts

With several challenges currently at play in the orthopedic devices market, many analysts have lowered their estimates for the current quarter. Over the last 30 days, 9 of the 24 analysts covering the stock have lowered their estimates for the first quarter of fiscal 2012, with 3 revisions northward.

On the other hand, the optimism among some analysts emanate from new product launches and resulting benefits from restructuring over the long term. As a result, for fiscal 2012, 15 analysts have increased their estimates over the last 30 days with 3 negative revisions.

Although Zimmer did not experience any further deterioration in procedure rates, widespread economic uncertainty is resulting in procedure deferrals. Besides, pricing pressure deteriorated in the fourth quarter with a 1.6% decline compared with -0.9% witnessed in the preceding two quarters. With respect to guidance for 2012, the company expects the market condition to remain challenging but relatively stable. Pricing is expected to decline by 2% in 2012, worse than 2011. This guidance takes into account the impact of bi-annual price cuts in Japan and the increase in pricing pressure witnessed in the fourth quarter

However, as the situation gradually improves, Zimmer is well poised to reap the benefits of a strong portfolio and a wide geographical reach. Over the past few quarters, the company has been investing in its product portfolio and several new products are being launched that should support the top line going forward.

Magnitude of Estimate Revisions

The magnitude of estimate revisions has been insignificant for the first quarter, in the past 30 days. Overall, the consensus estimate for the current quarter has gone down by a penny to $1.30 while the next quarter estimate remained static at $1.33. The consensus estimate for fiscal 2012 increased by 4 cents to $5.26 over the last 30 days to reflect market optimism based on an improving environment.

Neutral on Zimmer

Zimmer, one of the leading orthopedic medical devices companies with prime focus in the area of hip and knee implants, is leaving no stone unturned to perform in a challenging scenario. We believe the company has, to a large extent, succeeded in that effort.

The company's Knee business, contributing 40% to the top line, is witnessing traction from its Patient Specific Instruments ( PSI ), Mobile Bearing Knee System and Revision products. Besides, several new products within the Knee franchise are slated for launch in 2012. The company also expects to record higher sales from the Hip business in the forthcoming period based on the launch of the CLS Brevius Stem with Kinectiv Technology in the US market in the fourth quarter of 2011. However, we expect lingering pressure in the company's spine business.

Strong performance in international segments emphasizes the positive impact of the company's investments in established markets as well as its strengthening presence in emerging markets that provide long-term opportunities for growth. The company's strategic investments in these regions over the past several quarters to improve operational and sales performance are yielding results.

Based on a strong cash balance, Zimmer intends to return 1/2 of its net income to stock holders through share repurchase programs and dividends and targets suitable acquisitions in the musculoskeletal space. The recent acquisition of ExtraOrtho with its external fixation line, XtraFix External Fixation System, is expected to broaden Zimmer's existing portfolio of trauma-care solutions and also bolster its position in the $820 million worth external fixation market.

Moreover, Zimmer remains committed on delivering additional returns to investors leveraging a solid balance sheet and healthy free cash flows. The company also made several acquisitions in the recent past to diversify its portfolio. Besides, the restructuring initiatives to boost productivity should also benefit the company in the long term. However, Zimmer faces tough competition from players such as Smith & Nephew ( SNN ), Stryker Corporation ( SYK ) among others.

We have a Neutral recommendation on Zimmer.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These "Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/

SMITH & NEPHEW ( SNN ): Free Stock Analysis Report
STRYKER CORP ( SYK ): Free Stock Analysis Report
ZIMMER HOLDINGS ( ZMH ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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