Will S.E.T. Arm Drive Zimmer Biomet's (ZBH) Q3 Earnings?

Zimmer Biomet Holdings, Inc.ZBH is expected to beat earnings when it reports third-quarter 2017 results on Nov 1, before the opening bell.

Last quarter, the company's earnings missed the Zacks Consensus Estimate by 0.95%. However, it reported an average beat of 0.36% for two of the trailing four quarters. Let's see how things are shaping up prior to this announcement.

Key Catalysts

Similar to the prior quarter, the company is expected to gain from strength in the S.E.T. (Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma) arm. Revenues at S.E.T. were driven by surgical business and sports medicine offerings such as Gel-One, Subchondroplasty and Quattro Link in the last reported quarter. Moreover, solid uptake of the A.L.P.S. Plating System within the foot and ankle portfolio boosted the segment's performance.

The Zacks Consensus Estimate for S.E.T. revenues of $411 million reflects an increase of 2.2% from the year-ago quarter.

Zimmer Biomet Holdings, Inc. Price and EPS Surprise

Zimmer Biomet Holdings, Inc. Price and EPS Surprise | Zimmer Biomet Holdings, Inc. Quote

We are also upbeat about the Spine, Craniomaxillofacial and Thoracic (Spine & CMF) segment, which is expected to deliver another quarter of promising performance. Under the spine category, Zimmer Biomet should continue to gain from strong uptake of Mobi-C Cervical Disc. Moreover, though at the initial phase of integration, the LDR Holdings acquisition is expected to contribute approximately 30 basis points to the company's top line in the to-be-reported quarter. Also, management is hopeful of gaining from significant cross-selling opportunities that the LDR acquisition provides on the back of integrated spine sales force in the United States.

Also, continued solid uptake of SternaLock Blu and SternaLock 360 primary closure systems as well as the RibFix Blu Thoracic Fixation System within craniomaxillofacial and thoracic arm buoys optimism.

The Zacks Consensus Estimate for Spine & CMF revenues of $188 million indicates a rise of 2.2% from the year-ago quarter.

Here are the other factors that might influence Zimmer Biomet's third-quarter results:

Looking at the focused execution of Zimmer Biomet's sales teams, we expect the global adoption rate of the company's flagship personalized knee system - Persona - to be impressive. In this regard, in September, the company announced the launch of the Persona Partial Knee System. This is the latest addition to its portfolio of personalized and anatomically designed knee implant systems. Also, in June, Zimmer Biomet announced the release of its X-ray-based Patient Specific Instrument, X-PSI Knee System. This is the world's first CE-Marked surgical planning system that allows for patient-specific implant positioning, solely utilizing X-ray technology. These developments are expected to boost the top line in the third quarter.

Emerging markets have always been a significant revenue generating source for Zimmer Biomet. Despite the recent economic downturn which affected Zimmer Biomet's business in Latin America, the company managed to drive growth through its operations in other parts of the emerging market, especially the Asia-Pacific and EMEA (Europe, the Middle East and Africa). The Zacks Consensus Estimate for third-quarter revenues from EMEA of $379 million indicates an improvement of 2.7% from the year-ago quarter.

Overall, Zimmer Biomet expects third-quarter revenues in the range of $1.815-$1.845 billion, reflecting a negative impact from foreign exchange of 0.5%. The Zacks Consensus Estimate for third-quarter total revenues is pegged at $1.83 billion.

However, factors like macroeconomic uncertainties and unfavorable currency fluctuations have been adversely denting Zimmer Biomet's sales over the past few quarters. Moreover, the company has also been dealing with pricing pressure issue. In this regard, Zimmer Biomet faced a negative pricing pressure of approximately 2.6% in the second-quarter. Thus, in absence of any favorable changes in this line, the company may continue to face these headwinds in the to-be-reported quarter as well.

Meanwhile, for the second half of 2017, management continues to expect the adverse impact from reduced sales expectations, continued spending in critical programs and rising manufacturing costs from Warsaw North Campus facility to persist.

Here is what our quantitative model predicts:

Zimmer Biomet does not have the right combination of two main ingredients - a positive Earnings ESP and Zacks Rank #3 (Hold) or higher - needed for increasing the odds of an earnings beat.

Zacks ESP : The Earnings ESP for Zimmer Biomet is -0.38%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Zimmer Biomet carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

The Zacks Consensus Estimate for earnings of $1.75 reflects a 2.2% decline on a year-over-year basis.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

The Cooper Companies, Inc. COO has an Earnings ESP of +0.43% and a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Thermo Fisher Scientific Inc. TMO has an Earnings ESP of +0.19% and a Zacks Rank #2.

Align Technology, Inc. ALGN has an Earnings ESP of +0.74% and a Zacks Rank #3.

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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.

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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