We have reaffirmed our Neutral recommendation on
Zimmer Holdings
(
ZMH
) with a target price of $69.00.
Zimmer reported third quarter adjusted earnings per share
(EPS) of $1.15. The results surpassed the Zacks Consensus
Estimate by a couple of cents and were ahead of the year-ago
earnings of $1.04. Revenues were $1.026 billion, up 2.5% at CER
and almost in line with the Zacks Consensus Estimate. During the
quarter, currency was a major headwind and reduced revenues by
3.1%.
During the reported quarter, increased volume and changes in
product mix contributed 5 percentage points of year-over-year
sales growth, which is 2 percentage points better than the
year-ago quarter and 1 percentage point better sequentially. We
are impressed to note that during the quarter, procedure volumes
in the broader musculoskeletal market remained stable, 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 U.S., offset by
modest weakness outside the U.S. We expect the situation to
improve with procedural deferrals diminishing with time.
Zimmer should also benefit from favorable long-term trends
that point toward 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 ongoing
shift in demand to premium products, such as Prolongand
Vivacit-EHighly Crosslinked Polyethylene, Trabecular MetalTM
Technology products, high-flex knees, porous hip stems and the
introduction of patient specific devices, is expected to remain
favorable to sales growth.
Over the recent past, Zimmer has been working to strengthen
its foothold in the emerging markets that provide long-term
growth opportunities. 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. This, according to the company, had a
greater-than-expected impact on pricing and will continue to do
so for the remainder of the year. Zimmer faces tough
competition from players such as
Stryker
(
SYK
) and
Smith & Nephew
(
SNN
), among others.
Our recommendation is backed by a Zacks #2 Rank (Buy) in the
short term.
SMITH & NEPHEW (SNN): Free Stock Analysis
Report
STRYKER CORP (SYK): Free Stock Analysis
Report
ZIMMER HOLDINGS (ZMH): Free Stock Analysis
Report
To read this article on Zacks.com click here.
Zacks Investment
Research