We have reaffirmed our Neutral recommendation on Zimmer
Holdings ( ZMH ) with a target price of $67.00.
Zimmer's second-quarter adjusted earnings of $1.34 per share
were ahead of the Zacks Consensus Estimate by a couple of cents
while revenues lagged the consensus estimate with a dip of 1.1%.
During the quarter, currency was a major dampener that reduced
revenues by 2.9%.
During the reported quarter, increased volume and changes in
product mix contributed 4 percentage points of year-over-year sales
growth, which is 1 percentage point better than the year-ago
quarter, but 1 percentage point worse sequentially. We are
impressed to note that procedure volumes in the broader
musculoskeletal market remained stable in the quarter, in line with
the company's expectations. Moreover, volume trends in the
reconstructive market remained relatively stable through the second
quarter with some improvement in the US, offset by modest weakness
outside the US. We expect the situation to improve with procedural
deferrals diminishing with time.
Zimmer should also benefit from favorable long-term trends that
point towards sustained growth, driven by an aging global
population, obesity, wear and tear of joints from more active
lifestyles, growth in emerging markets, new material technologies,
advances in surgical techniques and proven clinical benefits of
joint replacement procedures. Moreover, the shift in demand to
premium products, such as the Prolong Highly Crosslinked
Polyethylene, Trabecular Metal Technology products, hip stems with
Kinectiv Technology, high-flex knees, porous hip stems and the
introduction of patient specific devices, is expected to positively
affect sales growth.
Over the recent past, Zimmer has been working to strengthen its
foothold 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. During the reported quarter, the
company acquired Exopro, a manufacturer of differentiated dental
implant products for the Brazilian market.
Pricing, however, continues to remain a major headwind for
Zimmer. The company experienced (2.1%) of pricing pressure in the
reported quarter, consistent with its guidance. Based on recent
trends, pricing for 2012 is likely to remain at (2%). We remain
concerned about the pricing scenario as it will be affected by cost
containment efforts by governmental healthcare, local hospitals and
health systems. In addition, effective April 2012, a biennial price
adjustment went into effect in Japan which will continue to impact
pricing for the remainder of the year, the effect of which was
greater than expected. The company faces tough competition from
players such as Stryker ( SYK )
and Smith & Nephew ( SNN ),
Our recommendation is backed by a Zacks #3 Rank (Hold) in the
SMITH & NEPHEW (SNN): Free Stock Analysis
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ZIMMER HOLDINGS (ZMH): Free Stock Analysis
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