Merger Synergies Boost Zimmer Biomet

08/19/2016 7:00 am EST

Focus: STOCKS

Our latest featured stock designs and markets a broad portfolio of medical solutions for the orthopedic reconstructive market, including implants and artificial joints, explains Joe Laszweski, senior analyst with Stack Financial Management and contributing editor to InvesTech Market Analyst.

The orthopedic industry represents an estimated $50 billion per year segment of the health sector – a portion of the market which offers strong growth opportunities.

Demographic trends, including an aging population, rising obesity rates, and emerging market growth, favor continued demand for products from Zimmer Biomet (ZBH).

Upon the merger between Zimmer and Biomet in June 2015, the combined entity became the second largest company within the orthopedic segment, and the clear leader in knee and hip replacement products with a commanding 39% market share.

Due to the specialized tools and training associated with these products, Zimmer has historically benefitted from high switching costs as well as an inherently loyal client base.

While this provides a stable revenue stream, the company has been deliberately expanding its product mix to include faster-growth segments such as S.E.T. (Surgical, Sports, Extremities, Trauma), spinal devices, and dental implants.

Initially, there were concerns surrounding the merger between Zimmer and Biomet. But the firm appears on track with cost saving and cross-selling synergies related to the merger.

Zimmer continues to maintain an investment grade credit rating and has a balanced plan to deleverage while returning cash to shareholders through both share buybacks and a growing dividend.

The P/E ratio of 17.7 is low compared to its industry peers, which have an average P/E of 24.3.

Looking forward, the company trades at 15.9 times full-year 2016 midpoint earnings guidance, and management currently anticipates double-digit earnings per share growth over the next several years.

The company’s growth prospects and low relative P/E ratio, along with its commanding market position, make this stock an attractive choice in a market where compelling values are hard to find.

As ZBH continues to realize synergies from the merger between Zimmer and Biomet, the company appears poised to deliver both earnings and dividend growth well into the future.

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By Joe Laszweski, Contributing Editor to InvesTech Market Analyst

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