Zimmer Biomet: A Leader in Orthopedics

07/30/2019 5:00 am EST

Focus: HEALTHCARE

Charles Carlson

Editor, DRIP Investor

Zimmer Biomet (ZBH) is a leader in orthopedic medicine. Products and solutions are used to treat patients suffering from disorders or injuries to bones, joints, or supporting soft tissues, explains Chuck Carlson, dividend reinvestment specialist and editor of DRIP Investor.

The firm provides orthopedic reconstructive products, such as knee and hip replacement products. Zimmer also makes products for face and skull reconstruction, as well as products that fixate and stabilize bones of the chest to facilitate healing. Other products include dental implants and prosthetics.

Knees (35% of total revenues in the first quarter), hips (25%), and S.E.T. (surgical, sports medicine, extremities, and trauma — 22%) are the largest product categories. Zimmer Biomet stock has traded sideways for the last couple of years.

Shares have been impacted by concerns over more stringent cost controls on health-care spending and what that may mean for reimbursement rates for orthopedic procedures.

The stock has also been impacted by operational issues at a manufacturing facility in Warsaw, Indiana. The company received a warning letter from the FDA last year regarding quality issues at the plant. Zimmer has been remediating the problems and hopes to have the process completed by the end of this year.

The good news for the company is that it plays in a market that should see steady demand as a result of the “graying of America” as well as the aging population in other parts of the world (about 39% of the company’s revenues come from overseas).

Revenues are likely to be flat this year but should tick higher in 2020, paced by new products. Per-share profits should reach $7.80 this year and approach $8.30 in 2020.

The stock trades at around 15 times 2020 earnings estimates, a very reasonable multiple for a stock in this sector but also a multiple that reflects the company’s near-term headwinds and sluggish operational performance.

I am a shareholder in Zimmer Biomet — I received my shares in Zimmer via its 2001 spin-off from Bristol-Myer Squibb (BMY) — and I like having exposure in the orthopedic space.

To be sure, Zimmer’s performance in recent years has been disappointing. However, I’m confident that once the fi rm puts its manufacturing issues behind it, growth will improve. Yielding 0.8%, the stock offers a value play in the health-care sector. 

Zimmer’s direct-purchase plan is a bit unusual in that the minimum initial investment is $10,000. Quite frankly, that is the largest initial minimum I have ever seen in a direct-purchase plan. Subsequent investments are a minimum $25. There is no enrollment fee.

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