Zimmer Biomet: A "Hip" Choice

02/22/2017 8:00 am EST

Focus: HEALTHCARE

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

A rapidly aging population creates challenges for the economy, and opportunity for investors. Americans are living longer and also living more active lives during retirement, asserts Ian Wyatt, editor of Million Dollar Portfolio.

Zimmer Biomet (ZBH) is a medical device company with a wide range of orthopedic products that help improve lives. The products include knee, hip, shoulder, elbow, foot and ankle artificial joints and dental prostheses.

The company's biggest product line provides knee replacement. Over the last 20 years, more than 5 million knees have been replaced with Zimmer's solutions.

Many Americans are overweight, and this includes senior citizens.  A 2014 report from the U.S. Census Bureau said that 72% of men and 67% of women over the age of 65 are either overweight or obese.

The combination of an aging overweight population, longer life expectancy and active lifestyle means that there is a growing customer base for Zimmer's products.

Zimmer has grown organically and through acquisitions. In 2015, the company acquired Biomet in a big $13 billion deal. Since then, the company has spent an additional $1.5 billion to acquire eight companies.

There is great uncertainty for any company in the health-care business. Much of the criticism of high prices and unsustainable costs is directed at the big pharmaceutical companies.

The same criticism can't be made of Zimmer Biomet. The company's prices have dropped by – 1% to 3% per year, making the life-improving solutions more affordable.

Since the company hasn't been raising prices, there is little chance that Zimmer will be attacked for charging too much for its products.

The future looks bright for Zimmer Biomet. The company is still digesting its sizable Biomet acquisition. It has already realized $225 million in annual savings, and by mid-2018, annual savings should total $350 million.

Over the next three years, the company plans to grow free cash flow by 25%. The goal is to achieve $2 billion in cash flow by 2020.

Zimmer pays a small 0.8% dividend. That dividend payment has been growing steadily, with an increase every year or two. Looking forward, Zimmer plans to increase the dividend payments by at least 7% per year.

Looking forward to 2017, analysts expect Zimmer Biomet to earn $8.56 per share. Based upon that estimate, the stock trades at 13.6-times earnings. For 2018, the earnings estimate rises to $9.38. That compares with the S&P 500 that is currently trading at 19-times 2017 EPS estimates.

My 12-month target price for Zimmer Biomet is $150. This is based upon the stock trading at a P/E of 16-times 2018 EPS.

The bottom line is that Zimmer Biomet is a cheap stock that will benefit from an aging population around the world. With 28% upside from the recent stock price, Zimmer offers lots of upside in a growing market.

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