We are reiterating our "buy" rating on Zimmer Biomet Holdings (ZBH), the nation’s largest pure-play maker of orthopedic devices, notes David Toung, an analyst with the leading independent Wall Street research firm Argus Research.
Despite COVID-19-related headwinds to procedural volumes, the company has made very good progress in resolving product supply issues.
We also see the ROSA robotics system and new product launches as drivers of orthopedics sales growth. Zimmer is a leader manufacturer of orthopedic implants. Given the demographic trends of an aging population, we see orthopedics as a long-term growth market.
Zimmer is experiencing a sharp and sudden global decline in elective surgeries that is slowing its orthopedics business. It now expects 1Q20 revenue to fall 8.5%-9.5%.
With the decline expected to continue in the second quarter and continued uncertainty over the scope and duration of the COVID-19 pandemic, the company has withdrawn its financial guidance for 2020.
Nonetheless, we believe that elective procedures, such as orthopedic joint replacements, are being deferred, not cancelled. This may lead to an increase in procedures, and associated strong demand for implants, later in 2020.
The return of procedural volume is also dependent on easing the burden of hospitals that must care for COVID-19 patients and on returning operating room and bed capacity to elective procedures.
Zimmer reports 1Q20 results on May 11th; in light of Zimmer’s preannouncement for 1Q20 and the withdrawal of its 2020 guidance, we are reducing our adjusted EPS estimates to $7.55 from $8.32 for 2020 and to $8.40 from $8.92 for 2021.
ZBH trades at 12.1-times our 2021 EPS estimate, below the average multiple of 15.4 for our coverage universe of med-tech stocks. We believe this is an attractive valuation. Given the recent market volatility related to the coronavirus, however, we are lowering our price target to $135.