On Aug 27, 2014, Zacks Investment Research downgraded Zimmer Holdings, Inc. to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold).
Why the Downgrade?
Zimmer has been witnessing a downward trend in earnings estimate revision over the past three months. For 2014, one estimate moved down in the past 30 days, with no upward revision. Likewise, for 2015, two estimates moved down, with no positive estimate revisions.
In the last two months, the Zacks Consensus Estimate for both the current quarter and 2014 earnings have declined. The Zacks Consensus Estimate for the current quarter fell 3.7% to $1.31, while the same for 2014 has dropped 1.3% to $6.05 over the said time frame. However, for 2015, the Zacks Consensus Estimate rose marginally by 0.6% to $6.57 over the same time frame.
On Jul 24, Zimmer posted second-quarter 2014 adjusted earnings per share of $1.49, up 4.2% year over year and a penny ahead of the Zacks Consensus Estimate. Following the earnings release, shares of Zimmer dropped 3.3% till the last closing date. Total revenue in the quarter was up 1.2% to $1.2 billion and met the Zacks Consensus Estimate.
Revenues at the Surgical and other group, and Spine and Dental segments declined during the quarter. Dental and Surgical and other group disappointed with declines of 1% and 10% in revenues to $61 million and $101 million, respectively. Spine division revenues also deteriorated 4% to $52 million. Zimmer’s gross margin contracted 50 basis points (bps) to 71.8% in the second quarter.
Zimmer’s leverage position has also deteriorated. The company’s long-term debt increased 1.2% to $1.69 billion while cash and cash equivalents declined 6.1% to $1698 million as of Jun 30, 2014 from the same as of Dec 31, 2013.
Zimmer lowered the high end of its 2014 adjusted earnings guidance to the range of $6.00–$6.10 from the earlier band of $6.00–$6.20. The current Zacks Consensus Estimate of $6.05 lies within the guided range.
Intense competition in the orthopedic market, macroeconomic uncertainties, pricing pressure and unfavorable currency remain areas of concern for Zimmer.
Other Stocks to Consider
Some better-ranked medical product stocks include ICU Medical, Inc. (ICUI - Snapshot Report), Abaxis, Inc. (ABAX - Analyst Report) and AtriCure, Inc. (ATRC - Snapshot Report). While ICU sports a Zacks Rank #1 (Strong Buy), both Abaxis and AtriCure carry a Zacks Rank #2 (Buy).